Research Problem 4. Ida Ross has decided to purchase a new home in a retirement community for $400,000. She has $50,000 in cash for the down payment but needs to borrow the remaining $350,000 to finance the purchase. Her financial adviser, Marc, suggests that rather than seeking a conventional mortgage, she should borrow the funds from State Bank using her portfolio of appreciated securities as collateral. Selling the securities to generate $350,000 in cash would lead to a substantial tax on the capital gain recognized.

Therefore, a better strategy would be to borrow against her securities and then claim a deduction for the interest paid on the loan. How do you react to the financial adviser’s strategy?

Partial list of research aids:

Temp.Reg. § 1.163–8T(c).