Simply Taxes: Mortgages and the ‘all-cash’ buyer (formerly known as Revenooer Rants)
Jeff Quinn’s business/opinion column appeared in the North Lake Tahoe Bonanza from 1986 until his unexpected passing last August.
We know we can’t replace Jeff’s sense of humor, insight and writing style, so we are re-booting his long-running column under the title “Simply Taxes.”
The goal of Simply Taxes is to present relevant topics in tax compliance and planning, which can often be complicated, in simpler understandable terms. Today’s topic deals with the tax deductibility of interest paid on a home mortgage placed on a residence after the property was purchased with cash.
A large number of real estate transactions in our area are “all-cash.” A cash buyer is, after all, the best buyer! Many of these buyers may plan on obtaining a mortgage after the purchase. These buyers need to be aware that the IRS views differently what is considered “Acquisition Debt” versus “Home Equity Debt.”
So, 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 classified as Home Equity Debt.
Interest paid on up to $1.0 million of Acquisition debt is generally tax deductible, while the interest deduction on Home Equity Debt is limited to interest paid on only $100,000 of principal borrowed. In addition, interest on Home Equity Debt is not deductible for purposes of calculating the Alternative Minimum Tax.
Fortunately for cash buyers, there is a 90-day window during which they can obtain a mortgage after a cash purchase and have the mortgage treated as Acquisition Debt.
However, if a mortgage 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 Debt.
If you’re involved in an “all-cash” home purchase, you should consult with your advisors to evaluate whether a mortgage makes financial sense for you.
Considering the low cost of borrowing, for many it may make sense to place a mortgage on the property now. You can then decide how you wish to use the funds or you can decide to simply pay off or pay down the mortgage with any funds that you decide not to use.
CONSULT YOUR TAX ADVISER — this article contains general information about various tax matters. You should consult your CPA regarding the implications to your own particular situation. George Ashley is a shareholder in Ashley Quinn, CPAs and Consultants, Ltd., with offices in Incline Village and Reno. He may be reached at 775-831-7288, and welcomes comments at GAshley@ashleyquinncpas.com.
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