A few weeks ago we had tax genius Tom Wheelwright on the podcast. He brought up an interesting way that investors can deduct HELOC interest despite the new tax code--promissory notes. Since Natali and I are always looking for new ways to grow our portfolio and build wealth, our interest was officially piqued.
A promissory note is a legal instrument that functions like an IOU; it lists that the borrower agrees to pay back the loan and outlines the repayment terms. Typically, a promissory note is an agreement not regulated by the government—used for notes like private loans.
Unlike traditional bank loans, a promissory note can be constructed under a variety of terms. The lender and borrower are able to negotiate the interest rate, length of term, and payment schedule. This allows for more freedom, and the flexibility to decide upon terms that fulfill each party’s needs.
Legally, it’s best to ask your attorney or tax team for a promissory note template. The note should be signed by both parties, and the file must be date stamped. Tom Wheelwright explained that despite the new tax code, real estate investors could use a promissory note to deduct HELOC interest.
In this instance, the promissory note proves that the acquisition is an investment, which qualifies it as tax deductible. We decided to use this strategy by lending money from our HELOC to one of our businesses. This is so powerful because not only are we able to purchase more real estate and deduct the interest, but we can also match or increase the amount of interest that the bank charges us on our HELOC.
To hear more about this topic, check out episode 304 of the Investing in Real Estate Podcast! And to learn about how the tax code effects real estate investors, listen to my interview with Tom Wheelwright