If tenants are willing to treat it as such, maybe it's not a good fit.

Would they just be passive losses that can offset passive income or can we treat them to offset capital gains from other investments ?

Obviously, the interest I earn from lending would be taxable income, but how would the initial investment be treated for tax purposes?

Lowering the Fed funds rate without addressing runaway goverenment spending is like trying to treat cancer with an aspirin.

Both will treat you well over the long term. 

Also many fail to look at tax consequences of debt funds - they are taxed differently and I know funds where 10% gross will be a far better return than 12% gross because of how they are treated.- Uses no or very, very little fund leverage (LOC for less than 20% of fund equity) This is very important component to realize and understand - where are you in the debt stack- Lends in one specific location/region that fund managers have deep operational experience in and which has speedy foreclosure laws.

So with your income, it likely won't apply depending on your final AGI.However, if you qualify as a "real estate professional" by IRS standards, your rental income can be treated as active.

Not a scam but if I was a buyer being treated like that by a seller, Id be walking fast.

My thought process is we could essentially treat the HELOC like a mortgage on the property that will be paid off in June.

@Pratik JhaveriAn LLC that is NOT treated as a C-corp is considered a pass-through entity.