2nd Mortgage interest deduction on capital gains

Apr 16, 2006 2 Replies
J

Besides the fact that this strategy is very risky, if I were to take out a second mortgage on my primary home and use the entire loan amount of the second mortgage to invest it in high yield corporate bonds, could I deduct the loan interest and closing fees from the capital gains generated with this cash? Since the sole purpose of the loan is to generate income, wouldn't it be considered a business expense? I searched the IRS website, but haven't found any relevant information for this particular use of a qualified second mortgage.




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B

The interest would be deductible on Schedule A as investment interest to the extent you have net investment income. For capital gains to count as for this purpose, you would have to elect to have those capital gains taxed as ordinary income.

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B

You will probably find that the mortgage interest deduction is limited interest on acquisition indebtedness, which is defined in the Treas. Regs. You will find your answer there... As for a business expense, you generally cannot deduct an item as a business expense unless you are holding the underlying asset for business purposes. I suppose there could be facts that might make this possible, but I really doubt your house is being held as a business asset... Best of luck. Gary Brolis

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