Election to Treat Secured Debt as Unsecured
Taxpayers can elect to treat any secured debt as unsecured. (Reg. 1.163-10T(o)(5)) The election is irrevocable without IRS consent. By making the election, the interest on the loan can be allocated to use of the proceeds by using the general tracing rules of Reg §1.163-8T.
Caution: By definition, home mortgage debt must be secured by the home. If this election is made, the debt is no longer treated as secured by the home. Therefore, if this election is made, no portion of the interest on the debt can be allocated back to the home.
Unsecured Election Serves No Purpose During 2018 -2025
This election was useful prior to tax reform when the interest on the first $100,000 of equity debt had to be deducted as home equity interest on Schedule A. Electing the debt to be unsecured permitted the tracing rules to be applied to the entire debt, allowing more home equity debt to be traced to another use. However, with the advent of tax reform it is unnecessary since any refinanced home acquisition debt continues to be home acquisition debt and any additional debt is traced to its use using the general tracing rules.
Caution - If before the passage of TCJA (before 2018) a taxpayer had utilized the unsecured election, that election is irrevocable without IRS consent and thus the loan continues to be treated as unsecured, and since home acquisition mortgage debt is defined as being secured by the home, none of the interest allocated to home acquisition mortgage debt is deductible on Schedule A or anywhere else.