Are you leaving money on the table when it comes to your taxes? For many real estate investors, the answer is "yes." If you've used a Home Equity Line of Credit (HELOC) to purchase a rental property, you might be missing out on a crucial tax deduction without even realizing it. The 10 T election is a game-changing tax strategy that can save you thousands of dollars—if you know how to use it correctly.
Understanding the 10 T Election
The 10 T election refers to a little-known tax rule that could make a huge difference in your deductions. Specifically, it allows real estate investors who used a HELOC to buy rental properties to deduct the loan’s interest as a business or rental expense. Without this election, you may find yourself in a tax bind, unable to deduct the interest on either your personal or business tax forms.
The Hidden Tax Trap of Using a HELOC for Rental Property
One common mistake many real estate investors make is assuming that the interest on their HELOC is automatically deductible on Schedule A (personal deductions) or Schedule E (rental income/expenses). The IRS has strict guidelines about what qualifies for these deductions, and if your loan wasn't used to buy, build, or improve the property securing the loan, you may not be able to deduct the interest at all—unless you make the 10 T election.
Without this election, you may end up paying far more in taxes than necessary. For many investors, the result is years of missed deductions and inflated tax bills.
Real Client Example: A Costly Missed Election
One of my clients encountered this very issue. They had taken out a HELOC on their primary residence and used the funds to purchase a rental property. Their previous accountant didn’t make the 10 T election, which meant they couldn’t deduct the interest on their HELOC on either Schedule A or Schedule E. This mistake led to years of overpaid taxes and thousands of dollars in missed savings.
Fortunately, we were able to go back and amend their tax returns, make the 10 T election, and recover the deductions they were entitled to. This simple step saved them a significant amount in taxes.
Why the 10 T Election Is So Important
The 10 T election is essential for real estate investors using HELOCs because it allows the IRS to treat the loan as not secured by your home, even if it is. By doing this, you can deduct the interest on your rental property as a business expense, which can provide significant tax savings. Without the election, you could end up with interest that’s not deductible at all.
How to Make the 10 T Election
Unlike other tax elections, the 10 T election isn’t something you check off on a standard form. It requires a written declaration attached to your tax return. Here’s what you’ll need:
- Election Statement: A written declaration stating that you are making the 10 T election under Treasury Regulation Section 1.163-10T.
- Loan Details: Information about the loan, including the amount, the date it was taken out, and how the funds were used for your rental property.
- Property Information: The address of the rental property for which the loan was used, so the IRS can clearly see the relationship between the loan and the property.
- Interest Allocation: A breakdown of the interest being allocated to the rental property, especially if the loan was used for mixed purposes (both personal and rental).
If you’re unsure about whether the election was made for your loan, it’s critical to consult with a tax professional who understands this specific tax rule.
The Cost of Missing the 10 T Election
Failing to make the 10 T election can lead to serious financial consequences. Without it, you won’t be able to deduct the interest on Schedule E as a rental expense, nor will you qualify to deduct it on Schedule A. This could result in thousands of dollars in missed deductions over the life of the loan.
Real Client Story: How We Fixed the Problem
In the case of my client who missed the 10 T election, we saw just how much they had lost. They had been paying interest on a HELOC for years, assuming they could deduct it. Once we amended their returns and made the election, we were able to reclassify the interest as a rental expense, allowing them to reclaim a significant amount of money in missed deductions.
Why This Happens So Often
The 10 T election is not a widely known rule, and many accountants overlook it. Because it isn’t a standard IRS form, taxpayers often don’t even know it exists. This is where proactive tax planning becomes vital. A simple oversight can lead to costly mistakes that could have been avoided with the right tax advisor on your side.
Maximize Your Deductions with Proactive Tax Planning
To ensure you’re not missing out on key tax deductions, especially if you’ve used a HELOC for rental properties, it’s essential to have a tax advisor who understands the intricacies of tax law. At Anvil Tax, we specialize in helping real estate investors optimize their tax strategies and maximize their deductions.
Learn more about maximizing your rental property deductions in our post on How to Make the Most of Rental Property Tax Deductions.
Take control of your tax deductions today! If you’re uncertain whether the 10 T election applies to you, or if you’ve missed it in previous returns, schedule a call with me, Daveed Tuck, your Portland tax consultant and former IRS auditor. Together, we’ll review your tax situation, make any necessary corrections, and ensure that you’re getting the deductions you deserve.
Visit https://www.anviltax.com/#BookaRight-FitCall to schedule your consultation today!