My client bought a cottage in 2007 near his primary residence. He bought it by borrowing $300k against his primary residence. In 2007, if he treats it as a second home he can only deduct interest on $100,000 as the funds were not used to buy or improve the house backing the debt. This issue is not a concern. If in 2008, he puts the house into a partnership LLC (he and his wife will be the partners) (the house will be rental property) and refinances the loan backed by the primary residence can he use the tracing rules to treat the new loan as business interest and not mortgage ineterest? If this does not fly, I assume taking out a new loan backed by the cottage would give him deductible mortgage interest, correct?