Buried in the fine print of the One Big Beautiful Bill is a valuable change for real estate investors: starting in 2026, you’ll be able to deduct interest on rental-related loans even if the property used as collateral isn’t the one being improved.
Why This Matters
Under current law, if you take out a HELOC or mortgage to fund improvements on a rental property, the interest is only deductible if the loan is secured by the same property the funds are used on. That means you couldn’t tap equity from Rental Property C to build an ADU on Property A — at least not without losing the deduction.
Starting in 2026, that restriction is lifted.
What’s Changing?
Section 70501 of the One Big Beautiful Bill (2025) makes a key update to IRC §163(h), which governs the deductibility of interest. The law modifies the rules for “traced debt” on rental real estate, so the deduction now follows use of funds rather than collateral.
New Rule (2026 and beyond): If you use loan proceeds to improve, maintain, or acquire rental property, the interest is deductible regardless of which property secures the loan.
Example
Let’s say you have:
Rental A: Needs a new ADU
Rental C: Has lots of equity, no debt
Today, if you tap Rental C’s equity to build the ADU on Rental A, the interest may not be deductible. But in 2026, it will be — as long as the loan proceeds are clearly traceable to a rental-use improvement.
What Should Landlords Do?
Plan strategically: This opens the door to smarter use of equity across your rental portfolio
Keep documentation: You'll still need clean records showing that the borrowed funds were used for deductible purposes
Talk to your CPA: Especially if you're considering refinances, HELOCs, or cross-property improvements heading into 2026
Want to make sure your books are ready to track interest properly? Hedgi AI can label and trace these transactions automatically — even when QuickBooks gets confused.
Stay tuned for more practical tax tips as this historic tax law rolls out.