Deductible Mtg Int?

[Jill Graff]

Am I thinking this through correctly?

Situation: Taxpayer and spouse own home free and clear. FMV of home $500k. They are planning on taking out a mortgage, secured by their home, for:
1. $170k to be invested in mutual funds. (I assume this will be investment interest expense)
2. $250k to pay off son's mortgage. (I assume this will require a gift tax return). Parents are guarantor's on son's mortgage.

Question:
1. Since the new mortgage is not home acquisition indebtedness, or grandfathered indebtedness, I assume $100k of the $250k will be considered home equity interest that will be deductible. Is that correct?
2. If it is home equity indebtedness, then the interest tracing rules do not apply. I would just allocate proportionately.

Thanks in advance.

[Burke]

First Part:

#1: Yes, to the extent of investment earnings.
#2: Sounds like a gift. Why not pay off son's mortgage, in exchange for contract note from him to them, of which they can forgive annual exclusion amount each year. Or not. Interest must be imputed or stated in contract.

Second Part:

1. Yes. I have a client who did this.

[JG EA]

A couple of thoughts.

Agree on the 100k unless owned less than 90 days.

What is the degree of ownership? Can't be viewed as their second home can it?

[Jill Graff]

Ownership

Parents do not own the house, just guarantee the loan.