Double Taxation on Down Payment - Avoidance Strategies?

[Blake Smith]

My wife and I are in the process of closing on a third property we use for short-term rentals.  We're in a vacation area, typical high prices / high nightly rates scenario.  Our original two rentals are filed on a schedule E, we are not "real estate professionals" (yet...).

It occurs to me that we're paying for our down payment with after-tax money, and then, as the property generates income and we recoup this investment, we're being taxed again on the profit.  This feels like a double taxation situation, and I'm curious if there are any strategies to avoid it.  The down payment is about $160k total, so that's not an insignificant amount of double taxation.

We generally do not structure our rentals as part of an LLC, but would founding an llc and funding it with the amount of the down payment avoid some of this? It would give us a basis of $160k in the LLC, then...?

I also have access to a relatively substantial amount of HELOC money, we keep it as a safety net, but would it be wiser to draw that down and use that for the down payment? The main issue there is we'll actually be paying more in total interest (deductible, but still net lower profit), and it'll blow up our debt-to-income ratio past the point where we could finance later deals.

We only have a few days until close, which complicates things.  I thought I'd reach out to this community and see if anyone had any suggestions.  Any ideas or even reading suggestions (couldn't come up with anything good through google) would be appreciated.