Discussion:Excess Home Equity Debt Revisted

Situation: Taxpayer has a first mortgage of $190,000. No problem, home worth $600,000, etc.. It is acquisition debt. Deductible on schedule A.

They take out a second loan for $150,000. These proceeds are used in a way that would generate investment interest expense.

Option 1 - I assume they could treat interest on $100,000 of the $150,000 as schedule A home equity mortgage interest. The other $50,000 they could treat as investment interest expense on schedule A, due to the interest tracing rules, I assume???

or Option 2 - they could show the entire interest on the $150,000 as investment interest expense. Even if they did not elect out of home equity debt treatment??? (because of interest tracing rules). I realize if they do not elect out of the home equity debt treatment though, any future loans taken out on property (not used for improvments on said property) would not be deductible, assuming new loan proceeds not used for any deductible activity (schedule C, etc..)

Am I right on track here? I am not sure under the option 1 related to the excess $50,000. Since that is traceable to a deductible item, I assume without any election one can simply show the excess to the proper form? If the election out of home equity treatment is not made, could one flip flop each year in this example, treating the $100,000 of debt as home equity debt one year, then as investment interest another year (not sure this would ever happen, but just curious - seems like that would give to much flexibility).

Any comments welcome!!!