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I suspect your attorney friend has got some things muddled. What is true is that if you mortgage your house for more than its fair market value, like if you take out one of those 125% mortgages, then the interest on the amount over and above the 100% level is personal interest and not deductible on Schedule A.

There are no capital gains issues until you sell.

Um, may I suggest that you do not pay your attorney friend to to any work for you.
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