What Every Cash Buyer of Real Estate* Needs To Know

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Mortgage and Lending with Stearns NMLS #232164 CA BRE #01380812 BRE 01380812 NMLS 232164

If you're paying cash for a *primary or secondary residence, congratulations!  You'll have a better chance of getting your offer accepted and can close fast.  30% of home sales in California are sold to cash buyers according to the National Association of Realtors. 

cash

How many Realtors know to advise their cash buyers to seek tax advice in order to preserve their "acquisition indebtedness" mortgage interest deduction?  How many know that there is a 90 day rule that buyers must take advantage of in most cases?

If cash buyers don't obtain a mortgage loan within 90 days of the close of escrow they forever lose the ability to deduct mortgage interest based on the loan amount, also known in this case as acquisition indebtedness, except in the case of money spent remodeling. Cash buyers still may deduct interest for home equity loans up to $100,000 in most cases (known as the home equity deduction) and special rules apply to a refinance when cash was used to make improvements to the home.  There are other applicable rules best interpreted by your tax advisor. 

I am surprised that more real estate professionals don't know to advise their buyers to consult with their CPA, tax person or financial planner to be sure they understand the importance of this short window of opportunity for a major tax break that will save them tens of thousands of dollars over time.

For example:  A homebuyer pays $500,000 (remember, this does not apply to investment property) and takes out a $400,000 mortgage @ 3.5% for 30 years.

The interest they will pay in the first year is $14,000

If they are in the 25% taxbracket, they will be able to deduct approximately $3,500 in mortgage interest annualy and this does not include points paid or real estate property tax, both are also deductible (see your tax advisor for your specific situation)

$3,500 x 7 years of living in that home = $24,500.

So if you are bidding with cash or have a client who is doing so in order to get into contract, be sure to advise them to get tax advice about the 90 day acquisition indebtedness window as well as mortgage advice because there are rules to follow in order to get this financing done and knowing what to do and what not to do could save them thousands of dollars!

IRS Publication 936 

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Rainer
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Jonathan Fleming
Re/Max Accord - Oakland, CA

Very informative, helpful!

Sep 04, 2013 02:25 PM #1
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Mary Anne S. Daly

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