how do you rationalize the example below? (from the link I provided earlier in the thread) similar to the IRS example, the answer is that it is not deductible. In neither example does the author add the further clarifier that it's 'not deductible on Schedule A'. In fact, in this example the author states it is not deductible anywhere
Example 4: The taxpayer owns a rental property free and clear and wants to purchase a home. So he obtains a loan on the rental to purchase the home. Under the tracing rules the taxpayer must trace the use of the funds to their use, and since the debt was not used to acquire the rental, the interest on the loan cannot be deducted as rental interest. The funds can be traced to the purchase of the taxpayer’s home. However, for interest to be deductible as home mortgage interest the debt must be secured by the home, which it is not. Result: the interest is not deductible anywhere.
here is where i still see the logic breaking down. While I appreciate the language you pointed me to in publication 936:
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.
if it's limited as part of the Part II rules, you can deduct the interest elsewhere and I agree with that. But the Part II rules relate to the loan limits (e.g $750,000 now, $1mm previously, etc.) and not the requirements found in Part I.
"You can deduct home mortgage interest if all the following conditions are met.
• You file Form 1040 and itemize deductions on Schedule A (Form 1040).
• The mortgage is a secured debt on a qualified home in which you have an ownership
interest. Secured Debt and Qualified Home are explained later.
Note. Interest on home equity loans and lines of credit are deductible only if the borrowed funds are used to buy, build, or substantially improve the taxpayer’s home that secures the loan. As under prior law, the loan must be secured by the taxpayer’s main home or second home (qualified residence), not exceed the cost of the home, and meet other requirements."
is your position that if the taxpayer fail the Part I rules, it's okay, just deal with the Part II rules? if so, where is that in the publication?
The reason why I believe both the IRS example and the Example 4 from the link are not deductible ANYWHERE, is because they fail the Part I rules so the Part II rules are not germane.
In the original ask of this thread the taxpayer asked if he could use the proceeds of the HELOC to invest in the LLC and deduct the interest. Does he pass the Part I rules? NO!!! (because of the font in red above). That is the end of the story. It's not deductible ANYWHERE.
Where does it say that if you can't deduct it on Schedule A (Part I failure) you are welcome to deduct it elsewhere? How do you otherwise logically explain the two examples that are not deductible ANYWHERE?
I much appreciate it!
if you think my logic is flawed, please let me know and where it is flawed.
