When you buy a second home you might choose to raise the money by borrowing against your primary residence. Taking out a new mortgage on the new home may be more expensive, because of higher closing costs and mortgage rates.
Such a plan will have tax consequences. The first $100,000 of such a loan will be classed as home equity debt. You can deduct the interest on up to $100,000 worth of home equity debt, no matter how the money is spent.
What about the interest on the excess amount, if you borrow more than $100,000? The rest of the interest you pay is either nondeductible personal interest or investment interest expense that might be deductible. If you say that you’re holding the second home for investment, and the interest you pay is investment interest, you may be able to deduct that interest up to the amount of your net investment income.
Generally, your net investment income will come from dividends and interest, although you can count net capital gains, too, if that would work to your advantage.