Mortgage Interest and Depreciation Expenses

[David Dick]

My wife and I have decided to try being landlords (it's something we've discussed many times and now have an opportunity to get our feet wet). We just purchased a new home for ourselves using a HELOC on what will become the rental property. I already looked into that and my understanding is that the interest on that loan will NOT be deductible since we used it to buy a new primary residence and it was not reinvested in the property. We also still have the original mortgage on the house, which I believe the interest on that loan WILL BE deductible. Is that correct?

My other question is about determination of value for depreciation expense.  The original mortgage has about 30K left on it and the line of credit has about 20K on it.  The home appraised for 68K when we got the line of credit.  My first though was to use the appraisal value for depreciation.  But, I've been reading that it should be based on the purchase price and the cost of any major improvements added to that over time.  The original loan value about 8 years ago was 50K.  So, how should I determine the value to begin depreciation?  I know it goes over 27.5 years, but I'm not sure what value the IRS wants me to start with.  Obviously, I want to use the higher value (appraisal), but is that legal?  If not that, would I use the 30K left on the original loan, or the 50K that would be the combination of the original loan and the line of credit?