Congratulations on Buying Your Home with Cash!
In today’s market, we are seeing a much greater than average percentage of cash buyers. If you pay cash for a home, can you gain the benefit of "acquisition indebtedness" on mortgage debt placed on the home subsequent to a cash purchase? The answer is YES!
What is “Acquisition Indebtedness” and Why is it Important to a Home Buyer?
A mortgage that is used to buy, build, or improve a home can qualify for the preferential “acquisition indebtedness” status. Any mortgage that is used for any other purpose is demoted to the “home equity indebtedness” status.
If you do not put a mortgage on your property within 90 days of the purchase closing date, any mortgage you put on the property in the future that is not used for specifically for home improvements will be demoted to “home equity indebtedness” status. Home equity indebtedness is treated differently in the eyes of the IRS, which means:
· You will not be able to deduct any of the interest if you are subject to the Alternative Minimum Tax (AMT)
· You will only be able to deduct the interest on up to $100,000 of the mortgage balance if you are not subject to the AMT
On the other hand, if you do place a mortgage on the property within 90 days of closing and qualify for the special “acquisition indebtedness” status:
· You can use the funds for any purpose you want (including investment, starting a college fund for your children or grandchildren, retirement needs, etc.)
· You can deduct the interest on up to $1,000,000 of mortgage balance regardless of whether you are subject to the AMT
Is There a Deadline to Qualify for the Tax Benefit?
Yes! You must put a mortgage on the property within 90 days of the purchase closing date in order to qualify for the special “acquisition indebtedness” status.
What if I Wait until After 90 Days?
You lose the special tax benefits associated with the “acquisition indebtedness” status. Any mortgage you place on the property in the future that is not used specifically for home improvements will be classified as “home equity indebtedness”.
What is Your Next Step?
If you have paid cash, or are contemplating paying cash for a home, I would highly recommend that you take this information to your CPA or tax professional to get his or her opinion before making the purchase or financing the property.