PAYING CASH FOR THAT HOME?
Are you planning to buy a home in 2017 for cash?
I bet you did not know that if you purchased your home by paying cash, you still have 90 days to be able to access your homes equity and be able to deduct the interest portion of the loans payment off your taxes. After 90 days you lose almost all of that deduction.
For the past few years, San Diego has seen a large number of properties being purchased with cash. While many of these buyers have been foreign investors, many have been flushed with cash, looking to trade up or trade down. These buyers may have assumed it’s easier to purchase “all cash” and worry about possibly obtaining a mortgage later. These same cash buyers are likely unaware that the IRS views differently what is considered “Acquisition Debt” versus “Home Equity Debt.”
What is “Acquisition Debt” and Why Does It Matter?
Any mortgage used to purchase, build, or improve a primary or vacation home qualifies as “Acquisition Debt.” A mortgage that is used for any other purpose is defined as “Home Equity Debt.”
There are times when a buyer must “rush” to close using cash, even when it was their intention to finance their purchase. For these buyers, the IRS allows a 90-day window to obtain their mortgage financing and recoup the cash they laid out.
However, if a purchase-money mortgage on your primary or vacation home is NOT obtained within 90 days of the purchase closing, any mortgage on the property obtained in the future that is NOT used specifically for home improvements will be considered “Home Equity Indebtedness.” This means:
You may NOT be able to deduct any interest at all if you are subject to the Alternative Minimum Tax (AMT).
If you are NOT subject to the AMT, you will only be able to deduct the interest on up to $100,000 of the mortgage balance.
On the other hand, if you DO put a mortgage on your primary or vacation property within the 90 day window and qualify for “Acquisition Indebtedness:”
You can use the funds for any purpose you wish, such as investments, retirement needs, college costs, living expenses, even estate planning!
You can deduct the interest on up to one million dollars of the mortgage balance, regardless of whether you are subject to the AMT.
From a Realtor’s perspective, a cash buyer is the best buyer and seller. But is it really right for you?
As always discuss your options with a tax professional who knows you and you can make an informed decision together.
DISCLAIMER: This overview is provided for informational purposes only and does not constitute legal, tax, or financial advice. Please consult with a qualified tax advisor for specific advice pertaining to your situation. For more information on any of these items, please reference IRS Publication 936.
Nancy Bergman, CA BRE# 01893550, Windermere Homes and Estates – Rancho Bernardo is a local North County San Diego Realtor who specializes in Rancho Penasquitos, Rancho Bernardo, Poway, Carmel Valley and Escondido. She is a local agent who is also involved with her kids schools, Adobe Bluffs Elementary and Black Mountain Middle School. For more information on buying, selling, investing, contact Nancy Bergman at 858-617-9449 or www.sandiegohomesbynancy.com