Buying a New Home with Cash
90 Day Rule—Good or Bad Idea?
by: Jody Bruns www.JodyBruns.com
A BIG Reminder for Your Cash Buyers!
With many buyers still paying cash as an incentive for sellers to accept their offers, please remember to ask your cash buyers the question: "What is your intent for taking out a future mortgage and replenishing your cash reserves?"
Believe it or not, many people are buying homes with cash these days – especially in divorce cases.Regardless of the situation, they need to understand the ‘90 Day Rule’ and it’s important that we understand the rule as well so we can advise them accordingly.
The IRS gives you a 90 day window to put a mortgage on your property and gain the tax benefits
associated with ‘acquisition indebtedness.’ Any mortgage this is used to buy, build, or improve a primary or vacation home qualifies for ‘acquisition indebtedness. Any mortgage used for any other purpose is
considered ‘home equity indebtedness’. If you do not put a mortgage on your property within 90 days of acquisition, any future mortgage that is not used specifically for home improvements will be considered ‘home equity indebtedness.
This means that:
- You will not be able to deduct any of the interest at all 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 put a mortgage on the property within 90 days of acquisition:
- You can use the funds for any purpose you want.
- You can deduct the interest on up to $1,000,000 of the mortgage balance regardless of whether or not you are subject to the AMT.
If you have clients who are contemplating purchasing a new home with cash and thinking of pulling their cash back out at a later date, please have them call me to discuss the 90 Day Rule to avoid potential tax consequences as well as avoiding a ‘Cash Out Refinance” at potential higher rates.
Jody Bruns
720-692-7241
NMLS ID 831033
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