Home Equity Interest

Technical topics regarding tax preparation.
#1
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Publication 936 states “Interest on home equity loans and lines of credit are deductible only if the borrowed funds are used to buy, build, or substantially improve the taxpayer’s home that secures the loan. The loan must be secured by the taxpayer’s main home or second home (qualified residence), and meet other requirements.”

What if the proceeds from the home equity loan were used to pay the balance on a credit card for which that credit card was used to purchase the improvements? Therefore, even though the proceeds were not used directly for the improvements, they were indirectly used to pay for the improvements. Would the interest be considered deductible?
 

#2
JR1  
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I think you're picking nits. Yes for me.
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#3
JAD  
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I think the issue is whether the loan that is properly secured by the home that is used to pay off a loan that was not properly secured but was used for home improvements qualifies under 163. I researched this at some point and came to the conclusion "probably." Take a look at the tracing regs and the flush language of 163(h)(3)(B)(i)
 

#4
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There’s a rule about re-fi’s…but old debt has to be acquisition indebtedness, which the credit card debt isn’t. Next area to explore is the proximate in time rule (90-days), which is from a Notice. If you fit in great, if you don’t, it’s just a Notice.

Same issue here as the one with cash buyers, who buy now for cash and slap the debt on later
 

#5
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So it seems like another item that’s open to interpretation. The 90-day rule would maybe provide some type of “safe harbor” in a case like this. If the improvements were paid for in January 2022 and the home equity was created next month to pay the credit card balance, that seems like it would be acceptable. But if the taxpayer waits until December 2022 to take out the home equity loan and then pay the balance on the credit card, after the credit card has been used for many other purchases in between, perhaps not.
 

#6
JAD  
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Jeff-Ohio wrote:There’s a rule about re-fi’s…but old debt has to be acquisition indebtedness, which the credit card debt isn’t.


From deep memory, FWIW, but I thought that old debt could be secured later and qualify as acquisition debt at that time.
 

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