Buying a Home With Cash May Not Be Such a Good Idea

iStock_000016871386XSmallDid you know that the IRS gives you a 90 day window to place a mortgage on your new home and still take advantage of the tax benefits associated with “acquisition indebtedness”?

What is Acquisition Indebtedness and Why Does it Matter to Me?

Any mortgage debt used to buy, build or improve real estate qualifies as “acquisition indebtedness”. Any other mortgage is considered “home equity indebtedness”. Any mortgage you put on your new property after 90 days will be demoted to “home equity indebtedness” status. So what’s the difference?

With “home equity indebtedness” status…

  • If you are subject to the Alternative Minimum Tax (AMT), you will NOT be able to deduct ANY of the interest on the new mortgage
  • If you are not subject to the AMT, you will only be able to deduct interest on $100,000 of the new mortgage

With “acquisition indebtedness” status…

  • You can use the fund for any purpose – home improvement, college fund for the kids or grandkids, pay off other debt, travel, etc.
  • You can deduct interest on up to $1,000,000, regardless of whether you are subject to AMT

Is There a Deadline to Qualify?

YES! You must close on a mortgage within 90 days of your purchase closing date to qualify for “acquisition indebtedness” status.

What if I Wait Until After 90 Days?

You will lose the tax benefit described above associated with the “acquisition indebtedness” status. Any mortgage placed on the property in the future that is not specifically used for home improvement will be classified at the lower status of “home equity indebtedness”.

Why Would I Want a Mortgage On My Property in the 1st Place?

With interest rates as low as they are right now, you could benefit from the use of funds in a variety of ways including:

  • Investment- If you and/or your financial advisor can find a safe investment that yields more than 2% to 3%, that would match or beat the after tax cost of your mortgage
  • College Fund for Grandchildren or Children – Which inheritance would benefit them more – equity in a home or an education that would change their lives?
  • Elder Care Needs – Do you have long term care and savings in place to protect all of your investments as your age?
  • Retirement Needs – Do you have enough set aside to provide sufficient income in retirement?
  • Vacation Home or Other Property – Are you taking advantage of the rock bottom prices our market is offering right now?

There are other options and factors that you may also want to consider – read our article, “Should I Pay Cash for a House or Get a Mortgage?”  Remember, if you wait and decide to do a mortgage later you may not get to deduct any or all of the mortgage interest. It may make sense to obtain a mortgage now and put aside the funds until you know exactly what you want to do. The mortgage can be paid off at any time. I am available for a brief 20-30 minute conversation to discuss your options. You can take my recommendations to your CPA to get their opinion before making a decision. Give me a call.
Rob Ziebart

Rob Ziebart, CMP
Landmark Mortgage Planners
Office (352) 304-5700 or Cell(352) 875-6907


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