Scenario

House was owned by Client 1 and Client 2's father.  In 2013, the father used a quitclaim deed to transfer ownership to clients 1 and 2.   After the change in ownership, the father still had a mortgage of  $150,000 on the house.  The father passed in 2016, and the mortgage remained in the estate's name.  In 2020, Sister 1 and Sister 2's husband took out a $300k mortgage ($125k to pay off the father's existing mortgage, $25k for some home improvements and $150k in the bank).  Sister 1, sister 2 and sister2's husband all live in the house as their main home (and have for years).  We know the basis for sister 1 and sister 2 is equal to the father's basis. 

Do you agree they are entitled to deduct  50% of the interest and points (loan orig) on the new mortgage?  $125k (acq from dad's mortgage and 25k improvements) / 300k new loan.    

Been going over this one for a while and wondering if anyone has thoughts? :😊