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my information on the area of whether interest is tax deductible or not is the following: it does not matter what the source of the funds is, but the ultimate use. however, when talking about deductibility, most seem to focus on the source, which is an easy way to talk about deductibility, but is not always correct.

for instance, if you take a loan out against your credit card, well, conventional wisdom these days is that because of the source (credit card), it is characterized as personal interest and is not deductible. however, if you were taking money out of your credit card and put in into your brokerage account to invest, a cd, or simply a savings account, the use is actually not personal interest but would fall into the category of investment interest, which is deductible. when determining deductibility, the actual use over-rides the source.

on the flip side, if you took out a margin loan against your stocks to throw a lavish party for purely personal purpose, even though margin interest is usually deductible as investment interest, the use is personal so the interest on the balance withdrawn is personal interest and not deductible.

as a practical purpose, this is difficult to discern; most people just deduct all their margin interest and do not deduct any credit card interest. but in an audit, the auditor will likely look beyond those simple rules of thumb and consider what was the money used for.

i would appreciate if one of the tax experts on this board would confirm or correct my beliefs in this area.

this may apply to your situation, in that you were using the proceeds for a normally tax deductible interest purpose; however, there are many special tax considerations around home purchasing and qualifying as "acquisition debt" that may complicate the matter.
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