Home Equity Limits. Money invested in a business

[GTS1101]

A client yesterday refinanced their house in 2007 and took out 225,000 cash to invest into his business. The business he owns is a corporation. This is not a separate home equity loan. It is all wrapped up in the new mortgage. The new loan paid off old balances of 250,000 and they took out 225,000 for the business so therefore new loan amount is 475,000. I understand that he can only deduct interest up to 100,000 of the loan on Schedule A for equity debit not used to buy build or improve the house, but what about the other 125,000 that is over the limit. Can that somehow be deducted from his corporate tax return? I don't know much about preparing corporate taxes but I was wondering if he could deduct as business interest on his corporate return. If not any other ideas or suggestions?

Also regarding the rules for home equity limit, values in California and I am sure all around the nation are dropping rapidly. So let's say four years ago I bought a prop for 350,000. Two years later the FMV is 450,000. I take out an equity loan of 100,000 not used for imporvments but to pay off credit cards cars etc. If this year the property values drop to 300,000 does that mean I would not be able to deduct my home equity interest?

Thanks for any suggestions & ideas. This home equity limit & home mortgage acquisition can be difficult to understand and calculate.

Thanks!
GTS1101

[Gretel]

My 5 cents on the business loan part. Taxpayer should loan this money to Corp., draw up loan agreement and corp. pays and deducts interest. T/P then has investment interest and deducts that part of mortgage interest as investment expenses.

Tracing rules must be followed and also there is a specific formula how interest and principle is applied on mortgage portion and personal (investment) portion of loan.