I believe the HELOC interest should be deductible, but the CPA would be the best authority.The taxable income from your rental is:collected rent - expenses- interest- depreciationAnnual depreciation is the value of the improvements (i.e., not the land) divided by 27.5.If that's a negative number, you have a passive loss.

If you keep the flip after renovation, the 70k is a capital gain improvement, which then helps you to reduce your taxable income.

To calculate your taxable gain you will subtract the year 5 book value from the $1.2M.

@Ray Slack Having REPS status would allow you to utilize cost segregation studies to their full benefit therefore reducing your taxable income significantly that first year, thus giving you more money to invest elsewhere. 

This allow me to get only one taxable/reporting entity, I also have the anonymity provided by WY, and most important the excellent charging order protection from WY that you don't have in many state.I don't see any good reason for foreign registering an LLC in another state.

The value of the property is considered a taxable distribution. 

IF it were EMD you kept from a buyer that didn't perform, that would be income and taxable.

If the amount of the HELOC is less than 200k, they will only do a "desktop appraisal", they look at the "taxable value" and give you 75% of that amount.

You still get to take the remaining 20% depreciation later on or adjust your taxable gain when you sell the property.

The benefit is that you are still saving interest or receiving benefits, but those extra monies will simply stay in your taxable bank account since your non-tax policy is maxed out.