Second Home and Mortgage Interest
If a taxpayer does a cash out refinance of the primary home, and the cash is used for improvements on a second home, is the interest on the cash out portion of the refinance deductible as home mortgage on Schedule A? That is an interesting question with a convoluted result….
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To be deductible, interest on a first or second home, the debt must be acquisition debt secured by the home.
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If the loan is secured by the primary residence and the cash out is not used to make substantial improvements on the primary residence, then it becomes equity debt.
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Equity debt can be traced to its use, so it can be traced to the second, home.
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But the traced debt is not secured by the second home, so it is not second home acquisition debt.
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So, technically it would not be deductible as second home mortgage interest.
Wonder how many folks deduct it anyway?