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Home Mortgage Interest: Use It or Lose It!

Deducting Home Mortgage Interest

Did you pay cash for your home? Did you decide to take some cash out after closing? Did you know that you only have 90 days to refinance or you’ll forfeit your home mortgage interest write-off?

The IRS has tax law called Acquisition Indebtedness. It was enacted in 1988 under Notice 88-74. Here’s a summary:

To qualify for the home mortgage interest deduction, the debt must be acquisition debt. It must be less than or equla to $1,100,000 for one primary residence plus one vacation home.  Debt is incurred to acquire, construct or improve a residence if:

(1)

Proceeds are used to buy, construct or substantially improve a residence.

(2)

Debt is incurred within 90 days before or after the date of purchase. The amount of qualifying debt is the lesser of the amount of the debt or the purchase price.

(3)

Debt is incurred up to two years before completion of construction or improvements. The amount of qualifying debt is the lesser of the amount of the debt or the amount spent on the construction. In determining the latter amount, a homeowner may take into account only expenditures made no more than two years before the date the debt is incurred.

(4)

Debt is incurred up to 90 days after the completion of construction or improvement. The amount of qualifying debt is the lesser of the amount of the debt or the amount spent on the construction.

Debt is incurred on the date that the loan proceeds are disbursed to or for the benefit of the taxpayer. Generally this is the closing date.

EXAMPLE 

Rodney Renter buys a $200,000 home with money he won in the lottery. Thirty days later, he takes out a $140,000 mortgage secured by his home and buys furniture. Rodney can deduct all the home mortgage interest he pays on the mortgage because he took out the mortgage within 90 days of his home purchase.

EXAMPLE 

Ivan Investor buys a foreclosed property down at the courthouse for cash. 6 months later he decides to pull 80% of the cash out so he can buy another property. Ivan can’t deduct the home mortgage interest on his new loan because he took out the mortgage more than 90 days after his purchase.

PUTTING CASH BACK TO WORK

Cash has been on the sidelines for recent years. Volatility in world markets led businesses and individuals to hold tight to their cash. With signs of a growing economy we’re seeing growing consumer confidence. Therefore, cash is going back to work. And much of it is going towards real estate. Here in Orange County, CA approximately 30% of all purchases were made in cash this year. That’s a lot of dough!

Some of those purchases are homeowners and others are investors. They are using cash to leverage the terms of their offer. An all cash offer is more attractive to a seller because:

  1. The buyer does not have to qualify for a loan.
  2. The transaction is quicker.
  3. The appraised value is not a concern.
  4. With inventory so low, an all cash offer gets put at the top of the stack against the competing offers.

Some of those who have the cash to implement this strategy plan on getting their financing after the sale has closed. This gives them the time to get a loan and write off the home mortgage interest  in the years to follow. This works hand in hand with the delayed financing exception.

Most lending institutions require a cash buyer to wait 6 months before pulling cash out of a property. Not surprisingly, that’s exactly how long new homeowners will wait. But what they don’t know is that they’ll be losing out on the home mortgage interest deduction. This can amount to thousands upon thousands of lost dollars. That’s especially true here in Orange County, CA where home prices rank amongst the highest in the country.

Therefore, whether you’re a seasoned investor or Harry Homeowner, it’s important to know the rules. Otherwise it could cost you. Get your financing started soon after you acquire the property. You should have no problem closing within 90 days and deducting your home mortgage interest.

If you want more information or want to get started on your financing contact me. I’ll be happy to help!

Scott Storace

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