Consider the following scenario:
- an existing mortgage on a property worth 300k, with a current mortgage balance of 100k.
- a cash-out refinance for 200k, releasing 100k of funds.
If we use that 100k to purchase an empty lot, how is the interest on this debt taxed? (USA jurisdiction) I can come up with a few pieces of the puzzle:
- it's definitely NOT mortgage acquisition debt, since it wasn't used to build or improve the main home.
- if we buy that lot, and then choose NOT to build on it, does it count as an investment property? Presumably (or at least hopefully) the value will increase and as such that interest is deductible as an investment expense.
- if we end up building on that lot, does the interest become home acquisition debt (and thus taxable?)
Given that there's no way to tell at present whether the lot will become a home, or become an investment that gained/lost value, what happens in the interim before some decision gets made?