Deductability of cash out mortgage on first home used to purchase second home

for a single mortgage covering both the remaining balance in the first home and the total cost of the 2nd home. I have lots of home equity.

There was a discussion of this in early 2012. To deduct your mortgage interest, the home has to be security for the loan. Therefore, if you refi your current home and take out cash to buy a second home, the interest on the new loan is deductible to the extent that it represents the balance on the loan paid off plus up to $100,000 of home equity debt.

Example: You owe $200K on your current home that has a FMV of $500K. You refi and obtain a loan of $350K that you use to pay off the $200K and buy a second home. Your interest deductions are limited to the interest on $200K plus $100K of home equity.

Alan - I should go back and look at that thread from last year. I agree with your response, but then read:

link - ) Which seems to state otherwise. The article spells out a very similar situation and concludes "If the property qualifies as a second home then all the interest paid on the $288,000 loan will be deductible on Schedule A."

(The remaining mortgage pre-refi is $100K. And $40K is paying off unsecured debt)

I disagree. I used to agree until we had the discussion back in early

2012. I cam around to agree with D. Stussy. Further research came up with the following from the January 2012 discussion:

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 indebtedness.

I disagree. I used to agree until we had the discussion back in early

2012. I cam around to agree with D. Stussy. Further research came up with the following from the January 2012 discussion:

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 indebtedness. ============ To count as acquisition debt of the second home, the loan must be secured by the second home.

A loan secured by the first home to acquire a second does not create acquisition debt. It [may] create[s] home equity debt in the first home.

The debt tracing rules are clear on this fact.

Mr Stussy is correct.