Should I claim interest on Sub2?

[Curtis H.]

Hello BP family, 

My situation is an interesting one...

I am about to refinance the home I am living in Sub2 to get the loan in my name. I've been here through three tax cycles. When I took over payments in 2014, I told the seller he can claim the interest that year, even though I paid for half of it (or all of it seeing as he wasn't making payments). However for 2015 and 2016 I would be claiming it of course. Now I've already read on other posts that this is fine. I paid it, I claim it. If IRS asks for proof, I have the bank statements showing I paid the mortgage.

The question is about the refinance. This will be a $400K loan on a home now worth $600K. They are going to ask for two years tax returns for sure, and I haven't filed them yet. I am planning on doing my taxes in the next month, and I'm curious if claiming the interest on a home I am not on the loan for will bite me in any way? I don't want them contacting the lender obviously to verify anything and triggering the due on sale clause in case the financing doesn't go through with that lender. Also, would claiming the interest mess with my debt to income ratio at all? I already learned the hard way 3 years ago when applying for a loan that writing off a bunch of expenses on my rentals was a BAD move as it all but killed any chance I had at getting a loan for a home in CA because of DTI ratio. Since I had already filed the taxes there wasn't much I could do but ride it out. So I'm claiming NO EXPENSES on 2015 and 2016 even if I paid them. I want it to look like I made as much as possible those two years.

Any advice is appreciated. My whole 10 year investing plan hinges upon me successfully refinancing, then getting a HELOC on the $200K equity. I can NOT mess this up. The more I type the more I think I just won't claim it to be safe. If I don't claim it, I probably will lose a grand or two, but will sleep well at night. If I get greedy and claim it, and it comes back to bite me, I will hate myself for the next three years.