Loan on Property 1 for Downpayment on Property 2

[Diane Tycangco]

Hello!  I have a question.  If I got a home equity loan for Property 1 and used the proceeds as downpayment for Property 2 and then got a 2nd loan for the remaining 75% purchase price for Property 2, when I sell Property 2, can I use the Property 1 loan as part of the cost basis for computing Property 2 capital gains?

Every month, property 2 has been paying most of the mortgage on that Property 1 home equity loan. The only part that Property 1 pays on that loan is the escrow for property tax & insurance for Property 1.

Thank you for your insight.