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if we do the HELOC and we take out less than the initial cost of this house, but more than the initial mortgage, and we can track all the payments as going towards the new house, would the interest be deductible?

initial cost of the house isn't irrelevant.

A HELOC for more than the current mortgage is just like a regular cash-out refinance.
The part that's being refinanced (that was purchase money) is deductible.
The part that's more than that, but less than $100K is probably deductible.
And since you can track it going toward a new house that you'll live in, *maybe* that's deductible too since it is a "qualified home".
(I'd get the loan lined up, figure out if you're >$100K over, then post particulars on the tax board for more experienced opinions)
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