How to file taxes when you have an investment property with a HELOC loan?

I have always done my own taxes and never had to file long form because our deductions never accumulated higher than the standard deduction. However, this year I am unsure of what to do. We purchased a second house to flip. We took out a $45,000 HELOC loan on our existing home and the house is completed but has not sold yet. Just to add to the confusion we partnered with my in-laws on the buying of the house and they also contributed some money to the rehab. The deed of the house is in both names. Will we need to file anything extra with this loan and the investments we made into our second home or do we wait till it sales and then claim the proceeds on next years taxes? Any guidance would be great.

Generally you'll claim the costs when you figure your basis once you sell. Since you're not in the business of buying and flipping homes this is a capital gains transaction. The purchase price plus the costs of the improvements is your adjusted basis. The difference between that and the net proceeds from the sale is your taxable gain (or partially deductible loss.)

The HELOC interest would normally be claimed in the year that you paid it since it's secured by your home. There is an argument to be made that you'll use it against your basis as it was interest paid for the purpose of generating investment income so it really could go either way. If your tax bracket is above 15%, take it as an itemized deduction for 2007 if you can. Otherwise use it to adjust your basis when you sell.

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