@NCperson wrote:
then $2,000 of interest each year ($50,000 * 4%) would be part of Schedule A each year and the rest of the interest would be part of the investment property expense. The interest related to acquisition debt wouldn't go down until the mortgage balance was less than $50,000.
You are correct that if the taxpayer chooses to treat the debt as personal mortgage interest, the taxpayer can treat any payments as paying off the equity debt first, regardless of what the equity debt is used for. That would mean that in the first year, perhaps 33% of the interest would be deductible on schedule A; in the second year, 35% would be deductible on schedule A, and so on. However, our best reading of the relevant instructions and codes is that the equity debt can not be deducted as a business expense at the same time as the acquisition debt is deducted as personal mortgage interest.
if the taxpayer makes the election to treat the debt as not secured by the home, then the equity portion that was used to pay for the commercial property could be deducted as a business debt, as long as the tracing rules are also met. But since a personal mortgage must be secured by the home in order to deduct the interest on schedule A, if the taxpayer makes the election to treat the loan as unsecured, then the portion that is acquisition debt for the personal home is no longer deductible on schedule A.
The taxpayer may deduct the personal mortgage expense only, or the equity debt only if the tracing rules are met as a business expense, but not both.
