My client made an election to trace interest from his main home to a rental property. Two years later he stopped renting it and began using it as a second home. From that point on the interst deduction was lost. Now he wants to take out a home equity loan against the vacation home to replace the loan backed by his main home. Will this allow him to fully deduct the interest, as now the loan is backed by the vacation home or does the election to trace still control?
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Gut feeling is that the election still controls. -
My gut feeling is the new loan would void the election, however the debt now would be treated as home equity debt, not acquisition debt.
Does the taxpayer want to refinance anyway or only to void the election? If just to void the election it may not be worth the closing costs. The election can be revoked with IRS consent, but I don't know what the procedure and cost is to revoke the election.Comment
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I believe there is some verbiage in the election that says something like: unless the use of the property changes. So if rental was converted to personal, interest deduction was allowed in full. This is the way I understand it.Comment
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Jesse
The money borrowed against the main home was used to buy the second house.
I guess you are thinking that since the election to trace was made the original loan lost it's characterization as a home mortgage loan. So if the loan was refinaced by a home mortgage loan it could not make the jump to money borrowed to buy a home. It would just be home equity interest. I think this makes sense.
As this is taxed for AMT it would not solve the TP problem.Comment
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