Because the home is co-owned both parties have to sign off on the loan application; therefore, lenders might be somewhat hesitant to approve funds for a home equity loan with one of the owners having terrible credit. Because only one of you qualify for the loan, based on the information you provided, the lending institution, if they do approve the loan under those circumstances, will approve it for the borrower with the good credit, of course. Inasmuch as that person will be responsible for the repayment of same, the associated interest can be deducted on your 1040. Because the home is a business, both parties, I assume, are sharing equally in repayment, therefore deduction would be determined and claimed at a 50/50 split. If you somehow manage to borrow funds against this property and do pay the loan back on your own, you can draw up a Stipulation and Agreement with the other party specifying which party is indeed borrowing, paying, etc. This is a legal and binding contract and will satisfy the IRS's qualifications as long as only one person is claiming the entrie amount.