A client had no mortgage on his home. He then borrowed in the form of a mortgage $500,000. He used approximately $50,000 for renovations to his home. The other $450,000 has been put into an investment account. Following the tracing rules, obviously the interest on the $50,000 renovation is deductible as mortgage interest. I assume interest on another $100,000 is deductible as home equity indebtedness. Is the rest of the interest investment interest? Or can any more of it be taken as mortgage interest on schedule A? (The value of his home is in excess of a million dollars.)
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TTB, page 4-10:
So the portion of the mortgage that is not used to buy, build, or substantially improve a main or second home cannot be treated as acquisition debt. And since none of the mortgage was used to refinance other debt, and it is not grandfathered debt (debt taken out prior to October 13, 1987), the only other choice is home equity debt, which has a limit of $100,000.Acquisition debt:
• Mortgage taken out after October 13, 1987, to buy, build, or
substantially improve a main or second home.
• Total acquisition debt on main and second home combined is
limited to $1 million ($500,000 MFS) at any time.
Thus in your case, total debt allowed for purposes of deducting interest as mortgage interest is $150,000.
If the other $350,000 can be traced to an investment account, the interest on that debt could be deducted as investment interest, subject to the investment interest expense limitations on Form 4952.Last edited by Bees Knees; 03-23-2012, 08:29 AM. -
In other words, his investment interest is limited to his investment income.Comment
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