Client borrowed $200k from a bank on a home equity loan. He then loaned the $200k to his children who are paying him back with interest. Can he make the election to forego the treatment of the loan as a loan backed by his residence and trace it and treat as investment interest?
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Is the taxpayer not able to deduct the home equity loan interest?Originally posted by Kram BergGold View Post
Loan to family with terms that IRS deems too favorable can risk the IRS to recharacterize the loan as a gift. That is something to worry!Taxes after all are the dues that we pay for the privileges of membership in an organized society. - FDR -
There is no election to make. Since the borrowed funds were used to acquire investment property ... i.e. other loans ... the interest he incurs and pays on the borrowed funds is "investment interest." (See Code ยง163(d)(3)(A)) It is not "qualified residence interest" even though his home was used as collateral. The classification of interest is always traced to the use of the borrowed funds.Originally posted by Kram BergGold
The treatment of the interest the borrower pays as investment interest assumes that he loaned the funds to his children at a rate equal to or higher than the rate he incurs on the $200k he borrowed. As long as that's so, he should have no problem deducting the interest he pays, subject to the annual limit, of course.Roland Slugg
"I do what I can."Comment
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Agree with Roland as long as the loan to the children is arms-length and documented in writing.Comment
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TTB 4-11 Clears this UP
If the election is not made, the first 100k is still home equity debt and the rest gets traced. So in this case I am better off not making the election.Comment
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