Mortgage interest as investment interest expense deduction confusion

qhgnlm · ‎December 16, 2024

I'm trying to understand these two IRS publications in relation to each other:

I potentially want to purchase a home with cash + delayed financing, that I will live in as a primary residence initially. The loan would be secured by the home, but I don't need the loan to acquire the home.

And the critical question is: can I receive the loan proceeds into a new brokerage account, invest it all into stocks, and then deduct the mortgage interest against my net investment income?

Per the first line on IRS Topic 404 Dividends:

Dividends are distributions of property a corporation may pay you if you own stock in that corporation.

So when Pub 550 Section Investment Interest says:

If you borrow money to buy property you hold for investment, the interest you pay is investment interest

Investment property.

Property held for investment includes property that produces interest, dividends, annuities, or royalties not derived in the ordinary course of a trade or business.

Investment interest does not include any qualified home mortgage interest or any interest taken into account in computing income or loss from a passive activity.

My understanding thus far: "property held for investment" can be stocks, not literally rental real estate. But if the loan interest is on a qualified home mortgage, it's not investment interest. And a qualified home is first or second home:

Pub 936 says:

Qualified Home

For you to take a home mortgage interest deduction, your debt must be secured by a qualified home. This means your main home or your second home.

But here's where I start to get confused.

Further down in Pub 936 there's a subsection stating:

Mortgage proceeds used for business or investment.

If your home mortgage interest deduction is limited under the rules explained in Part II, but all or part of the mortgage proceeds were used for business, investment, or other deductible activities, see Table 2 near the end of this publication. It shows where to deduct the part of your excess interest that is for those activities.

Part II. Limits on Home Mortgage Interest Deduction

This part of the publication discusses the limits on deductible home mortgage interest. These limits apply to your home mortgage interest expense if you have a home mortgage that doesn't fit into any of the three categories listed at the beginning of Part I under Fully deductible interest, earlier.

And finally Table 2 of Pub 936 says to put "all or part of any mortgage proceeds for business, investment, or other deductible activities" on Schedule A (Form 1040), line 9.

It just says "your home mortgage" without explicitly excluding qualified first/second homes. So if my mortgage interest deduction is limited due to the loan being over $750k, can I take part of or all of the interest payment as investment interest instead (assuming it's traceable and all in taxable stock securities)?

There are external tax related articles claiming this is possible: