Can an individual take money out of their primary residence either by refinance or a second mortgage to purchase a second home?

Here is the problem in a nutshell, and one that everyone overlooks. Home (and second home) acquisition debt must be secured by the home.

Any money borrowed against the primary home, if not used to acquire or substantially improve the primary home, would be equity debt and currently the interest on equity debt is not deductible.

However, the tracing rules allow us to trace the use of the equity debt funds, which was to purchase the second home. Here is where the bad news comes in…. the debt is not secured against the second home. So, the interest is not deductible as second home mortgage interest, and unfortunately not deductible at all.