Interest deduction on home equity loan/HELOC against rental property to buy 2 other rentals

So to summarize, the answer to (1) is yes, and the answer to (2) is "yes and requires an irrevocable election to be made". Is that right?

Secondly, do you have a sense for question (3)? "NCperson" discussed it in a separate response, and I clarified the question in response.

Thank you!

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@Mike9241 wrote:

if the original HELOC is on property 1 the tracing rules Reg Section 1.163-8T(a)(3)

would say you allocate and deduct 

if on your home see this link

https://www.taxcpe.com/blogs/news/tracing-rules-that-apply-for-deductibility-of-interest

the thing is that if the election specified isn't made then based on current law (this article was written before the rules for deductibility of HELOC were changed effective for the 2018 tax year) without the election none of the interest would be deductible since the funds weren't used on the residence.

see examples 2a and 2b  the election is per reg sec 1.163-10T(o)(5)(i)

 

How to make the election
An election statement should be attached with the tax return in the year the debt is acquired. The tax code does not specify any specific format so simply attaching a note that states the intention will be sufficient. Here is an example:

Election Pursuant to Regulation 1.163-10T (o) (5) to Treat Debt as Not Secured by a Qualified Residence

20XX Form 1040

(Taxpayer's name) SSN XXX-XX-XXXX elects to treat $ amount of home equity indebtedness, the proceeds of which were used to purchase ........ (specify) as rental activity indebtedness.

The interest on this indebtedness for the tax year was $X, 000 and is being claimed on line 12 of the Schedule E.

 

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In IRS Pub. 527 (2020; Residential Rental Property) under Expenses paid to obtain a mortgage, it states:

Certain expenses you pay to obtain a mortgage on your rental property can’t be deducted as interest. These expenses, which include mortgage commissions, abstract fees, and recording fees, are capital expenses that are part of your basis in the property.

I now also found in IRS Pub. 535 (2021; Business Expenses) under Expenses paid to obtain a mortgage:

Certain expenses you pay to obtain a mortgage cannot be deducted as interest. These expenses, which include mortgage commissions, abstract fees, and recording fees, are capital expenses. If the property mortgaged is business or income-producing property, you can amortize the costs over the life of the mortgage.

My third question is now: (1) do I amortize and deduct or do I capitalize and (2) if the latter, whether I can simply proportionally allocate these expenses to their respective cost bases.

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@NCPERSON1 wrote:

 

• Is the interest on loans A, B, and C all fully deductible as rental/investment expenses? Yes on Schedule E
• If loan A were taken against my home instead of a rental property, is the mortgage interest on loan A still deductible as a rental/investment expense? yes, but only on Schedule E.  You can not deduct the interest on schedule A, even if you later sell the rental properties and maintain the debt. 
• Do I capitalize the loanexpensesfor loan A on a pro-rata basis between properties 2 and 3 (i.e. 30% toward the cost basis of prop. 2 and 70% toward prop. 3)?  Not sure what you mean by 'capitalize' the expenses.  you simply report the interest expense on Schedule E.  What loan expenses are you refering to? 

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