About 10 years ago, taxpayer purchased a rental property next to his parents’ home and financed with mortgage loan. When his parents passed away, he inherited their home and sold it. He used the proceeds to pay off the rental mortgage. This sale of the home upset his siblings and they wanted a share of the proceeds. So a couple of months later, he took out a home equity loan on the rental and used the proceeds to pay his siblings what would have been their share from the sale of the parents’ home.
Am I correct that this is a case where interest tracing rules apply and that none of the interest on the home equity loan would be deductible – much like Example #1 under “Interest Tracing Rules” on page 4-14 in TTB. Taxpayer has been deducting on Sch A since he took out the loan and I just want to make sure on this before I tell him that was incorrect
Thanks
Am I correct that this is a case where interest tracing rules apply and that none of the interest on the home equity loan would be deductible – much like Example #1 under “Interest Tracing Rules” on page 4-14 in TTB. Taxpayer has been deducting on Sch A since he took out the loan and I just want to make sure on this before I tell him that was incorrect
Thanks
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