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Hi all,

Need some tax help.. Here's my scenario.. I'm starting a business using HELOC money (home equity line of credit). I know I can deduct the interest expense. But here's the question - say my business makes $10k profit in its first year. Can I apply this $10k towards my mortgage (non-tax-deductible) instead of my HELOC (tax deductible)? And if so, can I do this indefinitely? Like say I used $100k of HELOC money, have $400k left on my mortgage, and in 3 years I've made $200k profit. Can I put all $200k against the mortgage and nothing against the HELOC, continuing to write off the interest expense? Is there any limit to how long and how much I can do this? Or do I need to put all (or part of the) business proceeds directly against the HELOC instead of my mortgage?

I like the idea of taking out the funds from the mortgage, getting the tax deduction, and then paying off my non-deductible mortgage with the business income. I know this is akin to the Smith Maneuver, but even in the Smith case I'm unclear how much you need to pay yourself back, and if you sell your investment for less than you bought it, can you continue deducting any leftover HELOC interest indefinitely?

Appreciate any insight :)
 

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The profit from you business is after tax money. You've paid taxes on it, and you can do with it what you will. Pay down your mortgage, or blow it on a vacation. It is up to you. You don't have to pay down your HELOC.

As I understand it, if you took out the HELOC to use money to try to make taxable money, then you can deduct it. You can't take out the HELOC and use the money for personal use and take a deduction for the interest paid. Keep a paper trail to show how you used the borrowed funds.
 

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Do whatever you want with your business income. It's yours. The direct use rule states that interest, where the principal amount of debt is incurred to generate property or business income, is fully deductible against the respective income. Just make sure you are current on your required HELOC payments.
 

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Yes, if you take a business loan in any form, pay at least your HELOC interest payments and your business expenses, taxes, employees, and are still left with a profit, you can do whatever you like with it, you do not have to pay back the loan.
 

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^It's actually better than that. You can borrow to finance your business expenses and use your gross income to repay deductible debt.
 
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