Investment Interest and Vacation Home

[Tenn CPA]

In 2010, client borrowed funds from broker to build lake house. Interest was paid for two years before it was "re-financed" with a first mortgage on the house. During 2010 and 2011, we suspended interest paid on the broker loan as investment interest. In 2012, we elected to treat her dividends and cap gains as ordinary on the Form 4952 so that we could deduct the suspended interest paid on the broker loan. IRS disallowed interest as if it was paid on a non-capital asset - as if it were personal interest. I want to contend the loan was borrowed and the interest paid to carry an asset which eventually became their vacation home. Help?

[ATSMAN]

In 2010, client borrowed funds from broker to build lake house. Interest was paid for two years before it was "re-financed" with a first mortgage on the house. During 2010 and 2011, we suspended interest paid on the broker loan as investment interest. In 2012, we elected to treat her dividends and cap gains as ordinary on the Form 4952 so that we could deduct the suspended interest paid on the broker loan. IRS disallowed interest as if it was paid on a non-capital asset - as if it were personal interest. I want to contend the loan was borrowed and the interest paid to carry an asset which eventually became their vacation home. Help?

Was the first loan secured with the property as collateral? Were the loan papers filed with the registry of deeds?

[Bees Knees]

You have two issues going on here.

1) Trying to deduct interest on a second home (vacation home) only works if the loan is secured debt on the qualified home. Since the money was borrowed from a brokerage account (secured by investments in the brokerage account), then it wasn't borrowed money secured by the home itself, and therefore cannot qualify as home mortgage interest on a second home.

2) Trying to deduct interest as investment interest means the money is borrowed to purchase investment property. How can a vacation home used for personal purposes be considered investment property? So unless you have mixed-use property where you are trying to allocate a portion of interest expense to a rental activity that produced rental income, you have a problem deducting any of the interest as investment interest.


Without a rental activity to turn some of the use into investment use, interest from a loan not secured by the vacation home is considered non-deductible personal interest.

[Tenn CPA]

Was the first loan secured with the property as collateral? Were the loan papers filed with the registry of deeds?

No, the loan was like a margin loan. Borrowed from a broker with her portfolio as collateral. Not trying to deduct as mortgage interest, but as investment interest. Thanks for any help.

[Tenn CPA]

You have two issues going on here.

1) Trying to deduct interest on a second home (vacation home) only works if the loan is secured debt on the qualified home. Since the money was borrowed from a brokerage account (secured by investments in the brokerage account), then it wasn't borrowed money secured by the home itself, and therefore cannot qualify as home mortgage interest on a second home.

2) Trying to deduct interest as investment interest means the money is borrowed to purchase investment property. How can a vacation home used for personal purposes be considered investment property? So unless you have mixed-use property where you are trying to allocate a portion of interest expense to a rental activity that produced rental income, you have a problem deducting any of the interest as investment interest.


Without a rental activity to turn some of the use into investment use, interest from a loan not secured by the vacation home is considered non-deductible personal interest.

Not the answer I was looking for, but thanks for your time.