Investment interest

TP wants to payoff second home mortgage and use money from a brokerage loan account to pay it off. Would the interest related to this payoff become investment interest? It would not be home mortgage interest because it is not secured by the home. Can it be classified as investment interest?

Please reword.

Under the interest tracing rules, you will want to look at how the proceeds were used. It was used to pay off a home mortgage. The brokerage loan is not secured by the home, so the interest expense is non-deductible.

Would the interest related to this payoff become investment interest?

I think this line is confusing. Are you referring to the accrued interest on the mortgage secured by the residence? I don't believe you are, and I think you are referring to the brokerage loan.

I agree with IDunno. Is this a 2nd loan (HEL) on same property? If so, has the taxpayer considered refinancing/consolidating the first mortgage.

I am referring to the accrued interest from the brokerage loan that was used to payoff the second home.

My client instead of refinancing, he decided to take money from his brokerage loan account and use it to pay off the mortgage. He wants to deduct the interest from the brokerage loan as it relates to the payoff. I am thinking it will now be investment interest limited to investment income rather than home mortgage. Just not sure. No one has done this before.

I am referring to the accrued interest from the brokerage loan that was used to payoff the second home.

My client instead of refinancing, he decided to take money from his brokerage loan account and use it to pay off the mortgage. He wants to deduct the interest from the brokerage loan as it relates to the payoff. I am thinking it will now be investment interest limited to investment income rather than home mortgage. Just not sure. No one has done this before.

Nope, not investment interest expense. I'm sure "someone" has done this before, but it is incorrect. As someone else said, they should consolidate the mortgages, but, maybe, he will run into the mortgage balance cap, and it will be non-deductible as well.

TP's reason for doing it this way is to avoid all the refinancing charges.

Nope, not investment interest expense.

Agreed. Investment interest is interest incurred in financing an investment. He has financed the purchase/refi of his personal home with this debt. It's N/D.

Thank you. I was afraid it would not qualify as either home mortgage interest since the new loan is not secured by the home and that it would not qualify as investment property since it is used personally. Big thank you!

I view this fact pattern as involving two separate taxable transactions. The first is paying off the brokerage loan, generating an investment interest deduction. And the second is making a payment on some unrelated debt (which has its own consequences), presumably funded via a nontaxable distribution from the brokerage account. That is, because I don't see any loan proceeds in the fact pattern, I don't see tracing entering into the analysis.

Nilodop makes a pretty good observation in this old discussion.

https://www.taxprotalk.com/forums/viewtopic.php?f=8&t=4435&p=45743&hilit=investment+interest+mortgage#p45743

So what if client sold stock, used proceeds to payoff mortgage, then used margin loan to repurchase the same stock just sold.

That would be investment interest, right?

But because they didn't go through the step of selling and re-buying the stocks the interest is non-deductible?

That is, because I don't see any loan proceeds in the fact pattern, I don't see tracing entering into the analysis.

Loan proceeds were from the “second home mortgage” as per the OP. OP didn’t, however, tell us what those second home mortgage proceeds were used for.

I found the references to the "second home mortgage" or to the "loan that was used to payoff the second home" confusing - second mortgage for your principal residence v. main mortgage for your 2nd home? To even start the conversation, we need to know all tracing history for the mortgage paid off.
This is not a mortgage interest.
For it to start being discussed as an investment interest, its proceeds need to be traced to investment expenses for some investments that produce taxable income.

I guess it's just me, but I'm still confused as to the facts. We have:

TP wants to payoff second home mortgage and use money from a brokerage loan account to pay it off.. That sounds like borrowing via margin loan and using the cash to pay off a second mortgage on a home.

I am referring to the accrued interest from the brokerage loan that was used to payoff the second home.. At first, that sounded to me like interest that had already accrued on the margin loan, and it made no sense.

My client instead of refinancing, he decided to take money from his brokerage loan account and use it to pay off the mortgage. He wants to deduct the interest from the brokerage loan as it relates to the payoff.. That sounds like margin interest yet to be accrued. He's a cash method taxpayer. When it's paid, the question becomes was it interest

which is paid or accrued on indebtedness properly allocable to property held for investment.

. (that's from the law).

That paid or accrued language (always?) refers to whether the taxpayer is cash or accrual method. Our guy is, I'm sure, cash method. So someone should look up whether, because it was used to pay off a second mortgage but came from a brokerage account, was the interest allocable partly to the second mortgage, which highly likely had some accrued interest on it when it was paid off, or to the investments.

And to further confuse me, we have Loan proceeds were from the “second home mortgage” as per the OP.. Idon't get that analysis. How do proceeds come from paying off a mortgage?

Post #6 looks pretty clear to me. The taxpayer has a second home which had a mortgage on it. He then took money from his brokerage account and paid off the mortgage.

Pretty clear that this is not mortgage interest and the OP doesn't seem to be trying to go that route. It seems the only question is whether this is investment interest or not. The consensus seems to be that it is not investment interest because the cash drawn on the investment account loan was not used to purchase investments, but used to payoff the mortgage.

By this rationale if he would've sold stocks and used the proceeds to payoff the mortgage, then used loan proceeds to re-buy the same stocks, he would be in the same position and have investment interest. But because he didn't sell stock first it is personal interest. What a joke.

If this is the case then tell him to sell enough stock or other investments to payoff the margin loan, then buy them right back. Of course watching for gains, losses, and wash sales. There...now it is investment interest. Sure seems like a ridiculous path to have to take to reach the desired result though.

My #16 gets at two points.

The facts are not clear.

And, if the facts are, as is likely, that he is using a brokerage loan to pay off the second mortgage, isn't part of that payoff for accrued interest to date of the payoff,and would that be interest on the second mortgage, for whic no tracing is required?

The facts are unusually opaque.

I'm having trouble seeing any loan proceeds in this fact pattern. The brokerage loan must have already been in place. Otherwise there would not have been any accrued interest for us to analyze. So I was thinking the brokerage account itself was the source of the funds to pay the other debt. BTW, the word mortgage is used, even though the debt was not secured by a home.

I see the facts entirely clearly from Bell’s posts. The taxpayer has a second mortgage on his principal residence that he wants to pay off. He borrows money from his brokerage account (securing the loan with his investments in the brokerage account) and pays off the second mortgage loan.

Several other posters have arrived at the correct treatment of the interest on the brokerage loan. Since the brokerage loan is not secured by the principal residence, it doesn’t qualify as home mortgage interest. 163(h)(3)(B)(i)(II). Using tracing of the loan proceeds as required by Reg. 1.163-8T, since the proceeds of the loan were used to make a personal expenditure, the interest is personal interest and is not deductible. 163(h)(2).