There are numerous special IRS issues related to interest tracing, including debts traced to the purchase of tax-exempt securities and debts traced to home equity line of credit (HELOC) loans. Learn more below.

Regulations will provide for purposes of section 163 that a debt may be treated as incurred in acquiring, constructing, or substantially improving a residence of the taxpayer to the extent that the proceeds of the debt are used, within the meaning of Reg §1.163-8T, to acquire, construct or substantially improve the residence. (Notice 88-74) Also see guide "Home Mortgage Interest".

Just because banks refer to them as equity debt does not mean the interest on a HELOC loan is not traceable to purposes other than non-deductible personal interest. Like any other debt the use of the loan proceeds determines if the interest on the loan is deductible and where it is deducted. Thus, it is possible for the interest on a HELOC loan to be home acquisition interest, business interest, investment interest, personal interest, etc.

The interest on loan proceeds used to acquire tax exempt securities is non-deductible investment interest. This rule also applies to any interest paid on a loan to produce any other tax-exempt income (IRC Sec 265).

If a student loan is not subsidized, guaranteed, financed, or is not otherwise treated as a student loan under a program of the federal, state, or local government or an eligible educational institution, a payee (lender) must request a certification from the payor (borrower) that the loan will be used solely to pay for qualified higher education expenses (Reg.1.6050S-3(e)(2)).Form W-9S, Request for Student’s or Borrower’s Social Security Number and Certification, is used for this purpose. See chapter 6.02 for more on higher education loan interest.