I posted a reply to one of D. Stussy's posts, that said as I can not
find any authority to support my position, I defer to his position.
I.e., acquisition debt requires the debt to be secured by that home. Any
debt borrowed in a refi that exceeds the balance of the old debt can not
be acquisition debt unless it is used to improve the home that secures
You are looking at the final purpose of the money to determine whether
it is held for investment, personal, or business reasons. I'm not
sure the law does this. The form 4952 has the instructions on it and
BEGIN QUOTE form 4952
Property held for investment. Property held
for investment includes property that
produces income, not derived in the ordinary
course of a trade or business, from interest,
dividends, annuities, or royalties. It also
includes property that produces gain or loss,
not derived in the ordinary course of a trade
or business, from the disposition of property
that produces these types of income or is
held for investment. However, it does not
include an interest in a passive activity.
So the 150k sitting in a bank account is investment property. Does
the IRS care about the final use of this property? If yes, then any
investment is personal use, because your investments today will be
used later (even years from now) to buy a bigger house, buy bigger
cars, fancy travel, gifts for kids and grandkids, etc.
Suppose you do win the argument that the 150k had a purpose in the
near-future of buying a vacation home, which is personal use, thus
disqualifying the interest paid on this amount as investment use. Now
suppose the person was very rich, having over 500k lying around. So
they buy the vacation home using this other money and leave the 150k
in the bank account earning interest or buying stocks with it, while
writing off the interest on the 150k as investment interest. So
suddenly because they have multiple sources of income, it becomes
impossible to trace where the 300k to buy the vacation home came from,
and the rich person gets benefits not afforded to a poorer person.
This doesn't seem fair and seems to violate the 14th amendment.
The original post didn't say what else the person had, but if he had
1099-INT income, 1099-DIV income from other sources, that would make
the investment interest deductible to the amount of 1099-INT and 1099-
My concern is that the parking of the money in the interest-bearing account
was only a temporary event. Note that in another reply, I did NOT say that
there wouldn't be any interest expense deduction but actually implied that
there may be. I look at the reason that the debt was incurred in the first
place, and that reason was to purchase real estate. If the reason for
incurring the debt were to invest, then I'd be more willing to call it
I did find IRS Guidance that supports D. Stussy's position. It is buried
in IRS Notice 88-74.
TREATMENT OF DEBT WHICH IS PARTIALLY ACQUISITION INDEBTEDNESS AND
PARTIALLY HOME EQUITY INDEBTEDNESS
Regulations will provide that a single debt may qualify as partially
acquisition and partially home equity indebtedness. Therefore, for
example, if a taxpayer incurs a debt secured by his qualified residence
and uses a portion of the debt proceeds to refinance an existing
acquisition indebtedness and uses the remaining portion of the debt
proceeds for purposes other than the substantial improvement of the
residence, the portion of the debt used to refinance the acquisition
indebtedness will qualify as acquisition indebtedness and the portion of
the debt used for other purposes will generally qualify as home equity
indebtedness, subject to the $100,000 limitation on home equity
See Reg. 1.163-8T(c)(4). This is where you have to use the tracing
rules for determining what type of interest expense you have.
=====================================================================(4) Allocation of debt; proceeds deposited in borrower's account?(i)
Treatment of deposit. For purposes of this section, a deposit of debt
proceeds in an account is treated as an investment expenditure, and
amounts held in an account (whether or not interest bearing) are treated
as property held for investment. Debt allocated to an account under this
paragraph (c)(4)(i) must be reallocated as required by paragraph (j) of
this section whenever debt proceeds held in the account are used for
another expenditure. This paragraph (c)(4) provides rules for
determining when debt proceeds are expended from the account.
Until you do something else with the proceeds, the bank deposit is
considered investment property and any interest expense you incur is
investment interest expense. It doesn't matter what your original
intent was for use of the debt proceeds. It remains investment property
as long as the funds remain in the account.
Right, but if you take that at face value, you've also reclassifed the
equity part of the debt as investment interest, meaning that the interest
on the equity debt portion is not deductible if there's no portfolio income
to offset it. I don't think we want to go that far, thus leaving only the
$50k which is not acquisition debt and exceeds the equity debt limit (of
$100k) as subject to the investment interest rules as interest on equity
debt is otherwise deductible regardless of how it's used.
I'm not in disagreement. I am merely saying bank accounts are investment
property and interest you pay on the debt that created the bank account
will count as investment interest expense unless you have the option to
treat it as something else and you elect to treat it as something else.
E.g., the cash from a refi can be deposited into a bank account and if
you have not already reached your $100K limit of home equity debt, you
can treat up to $100K of the bank deposit as HE debt and the balance
would be investment property debt.
Suppose there was just 100k of debt instead of 150k. Can you elect to
deduct the debt as either HELOC debt or investment interest? HELOC
interest is great because you can deduct interest on the full 100k,
but if you're in AMT and/or have lots of investment interest (1099-
INT, non-qualified 1099-DIV, short term capital gains) then investment
interest is better.
Good question for which I am not sure. However, IRC 163(d)(3)(B) says
that investment interest does not include qualified residence interest
as defined in 163(h)(3). That section includes both acquisition and home
equity debt as qualified residence interest. I most conclude that if you
have a secured loan that meets the definition of HE debt, then
depositing the funds in the bank does not change its character. It is HE
debt. I do know, that if you withdraw some funds and spend it on
capital improvements for the property that secures the loan, that amount
gets converted to acquisition debt. I must assume therefore, that if you
withdraw some of the money and spend it to fit up your business, you
have converted that portion to business interest. Any amount that still
remains in the account would continue to be HE debt and not investment debt.