Can you claim investment interest expense from HELOC on vacant land (previous homesite) ?

[Tlc1988]

I have a client that owned 4 lots, lot number 4 had his primary resident on it. The trailer was destroyed in 2005.  Because prices had bottomed out he has held the property since then. He has had the property on the market almost constantly since 2015. He combined 3 lots and sold them in 2020, for a profit. Lot 4 (homesite) is currently under contract, again for a profit.  I have not been deducting the mortgage on it because it was vacant land.

I asked every year since 2015 did he buy the land to hold for appreciation. He said no he bought it to live on.   He told me he had an offer but he refused to sell at a loss. My thought is this makes it investment property (property held to make a profit).  But then he through in it was a home equity not a regular mortgage on it. All my research says it would still be deductible as investment interest.

I usually do simple returns and want to make sure I am correct. My question: Would the interest on the HELOC be deducted as investment interest?

[sjrcpa · Accepted solution]

Probably, subject to investment income limits.

How do you get a home equity loan when there isn't a home?

[Tlc1988]

I had thought he had the loan before it was destroyed. But just looked back and date on the 1098 is 2008 and home destroyed in 2005 so I don't know. I know he said something to the local branch and the guy said "you mean we don't have any collateral? We won't say anything." OH and in 2019 he started making personal withdrawals that I'm separating out of the interest. What gets me is he has been allowed to only pay interest since at least 2014 other than one payment in 2017 his mom made for a lot he gave her (whole other part of the equation).  

I have had to start with a single purchase price for 6 lots, and a few years later a lot given to him. He then gave 2 lots to mom at different times.  Now combined the one gave him with 2 of the others before selling for one price. I'm really looking forward to next year when he's sold the lot that had the trailer on it. I thought he had bought his house the same year the trailer was destroyed but no, it was 5 years apart.