If you own rental property and use loans to fund improvements, there’s a quiet but powerful change coming in 2026 that could unlock new financing strategies — and bigger deductions.
Thanks to Section 70501 of the One Big Beautiful Bill, you’ll soon be able to deduct interest even when the loan is secured by a different rental property. This means smarter equity use, better cash flow, and more flexible financing for landlords.
What’s the Big Change?
Old Rule (2025 and earlier):
Interest on a rental-related loan is only deductible if the loan is secured by the same property being improved or acquired.
New Rule (2026 and beyond):
Interest is deductible based on how the funds are used, not which property secures the loan — as long as the use is for rental purposes.
In other words: “traced debt” rules apply to rentals, not just primary residences or businesses.
Real-World Example
Let’s say:
Rental A needs a $100,000 ADU
Rental C has $200,000 in tappable equity
Before 2026:
If you took out a HELOC on Rental C to fund improvements on Rental A, the interest might not be deductible.
Starting in 2026:
The interest is deductible — as long as the loan proceeds can be traced to qualified rental improvements on Rental A.
Strategy for Property Owners
This creates new ways for landlords to unlock and deploy capital tax-efficiently:
Tap the most favorable equity
Refinance or pull equity from the rental with the best loan terms — not just the one you’re improving.
Consolidate debt wisely
Bundle multiple project loans under one low-rate HELOC or refinance — as long as the use of funds is rental-related, the deduction will still qualify.
Prep your books now
The deduction follows the use of funds. You’ll need clear tracing documentation. Hedgi AI can automatically tag these transactions and create audit-ready records.
Time major projects for 2026
If you're planning ADUs, energy upgrades, or renovations, consider waiting until 2026 to take full advantage of the expanded interest deduction rules.
What Counts as Deductible Use?
Acquisition of new rental property
Improvements, renovations, repairs
Maintenance costs
Refinance of prior rental-use debt
Personal use, primary residences, or commingled funds may disqualify interest deductions — trace carefully.
Looking Ahead
This change brings real flexibility to real estate tax planning — especially for landlords with multiple properties or complex portfolios.
Want help modeling the best financing structure for your rentals? Or need your 2025 books ready to trace debt clearly when this kicks in?