Cash out refi or HELOC for new acquisitions: tax or other issues?

Question

I know that leveraging one property to buy another is a common discussion but I had a very specific question that I can't seem to find a clear answer to searching here and the web which is if you leverage one property (via cash out refi, term loan, or HELOC), if you can new count any/all of that debt as "acquisition debt" for purposes of deduction in Schedule E (presuming you're buying a rental).

In my case, I've been approved for a HELOC on my current primary home which has lots of unused equity, and then use that HELOC towards closing costs on a new SFH purchase that I would take out a conventional conforming mortgage on, and had been planning to just deduct the interest on the HELOC as home equity. But since that's limited to $100k, wondering if it's preferable (or possible) to count all that additional debt as acquisition debt for tax purposes.

I figured HELOC was easier, less expensive, and less painful than doing a huge jumbo loan cash out refi, so figured I'd just do that to get in the game and learn my way around, and then could just do a cash out refi later on to both pay down the HELOC and make other new acquisitions.

Bryan Wilson · Answer

The trickiest part I've had with HELOC's is whether a lender will allow you to use the funds for a downpayment.  I had many phone calls end with "No" and recently found someone who told me it isn't an issue at all for them to allow HELOC downpayments.From a tax standpoint although I'm an accountant I don't specialize in tax you would need to have enough mortgage interest to deduct on your Schedule A in order for it to be helpful.  HELOC interest is tax deductible along with Mortgage interest, but that property may not have enough interest combined with a HELOC's interest to allow you to claim it over your standard deduction amounts.

I love the HELOC approach because I don't have to change my mortgage terms and I don't have to pay any closing costs or roll into the loan.  I took out my HELOC and the bank covered all processing costs so I basically got a 10 year draw period with 15 year amortization at 5% for no cost to me up front.

I don't think either is a bad approach, but one seems like it is simpler.