To deduct interest expenses on borrowed funds, you have to use the funds to produce income from a business, investment or property. You cannot deduct interest on money borrowed for personal enjoyment. According to the rule, the mortgage interest on your home is not deductible.
You may find yourself in such an awkward situation: holding sizable debt-free investments producing taxable income while paying thousands of dollars of non-deductible interest on mortgage.
You may consider whether the following strategy could be benefit to you.
Step 1: sell the investments.
Step 2: use the proceeds to pay down the mortgage.
Step 3: arrange a loan or a line of credit using your house as collateral.
Step 4: use the funds borrowed to purchase investment.
Interest on the funds borrowed ("new mortgage") may be tax-deductible as the funds were used to purchase income-producing property.
