the loan interest may be deductible but it is a complicated subject because of the source
The rules for deducting interest vary, depending on whether the loan proceeds are used for personal, investment, or business activities. Interest expense can fall into any of the following categories:
Personal interest, which isn't deductible.
Investment interest (interest on debt that's for property held for investment), for which the yearly deduction is limited to “net investment income.”
Residence interest (interest on a home mortgage), which is generally deductible as an itemized deduction.
Passive activity interest (interest on debt that's for business or income-producing activities in which you don't “materially participate”), which is generally deductible only if income from passive activities exceeds expenses from those activities.
Trade or business interest (interest on debt that's for activities in which you do materially participate), which you can generally deduct in full.
Because of the variety of limits imposed on interest deductions, the IRS provides special rules to allocate interest expense among the categories. These “tracing rules,” as they are called, are generally based on the use of the loan proceeds.
Under the tracing rules, interest expense is allocated in the same way as the debt on which the interest is paid. The debt, in turn, is allocated by tracing payouts of the debt proceeds to specific expenditures. The property that secures the loan generally won't affect the way the interest is treated. It's the use of the proceeds that counts.
