Taxpayers can elect to treat any secured debt as unsecured. (Reg. 1.163-10T(o)(5)) The election is irrevocable without IRS consent. By making the election, the interest on the loan can be allocated to use of the proceeds by using the general tracing rules of Reg §1.163-8T.

Caution: By definition, home mortgage debt must be secured by the home. If this election is made, the debt is no longer treated as secured by the home. Therefore, if this election is made, no portion of the interest on the debt can be allocated back to the home.