“I saw your article on financing a cash sale within 90 days of closing for tax benefits… Can you close in 10 days?” Yes.
Its one thing to close a deal in two weeks (which also happened this month), especially when the minimum amount of documentation required is 25 separate documents, but closing a deal in 10 calendar days, including a holiday and two Sundays in that equation, is pretty remarkable. What’s funny is that most people think that a quick close is up to the lender when in fact it’s really the buyer/borrower who leads the pace of the close. Then, the lender, agent, appraiser, escrow company and any other involved third party need to be in expedited lock sync to close timely.
So why was financing so important in this case? For this scenario, had the buyers NOT financed the property, they would have given up a probable $15,000 tax deduction. Further, they would have had a highly concentrated equity position in real estate, which was inconsistent with their financial-planning goals.
Another question is, “Why did they have to finance the property BEFORE they closed?” The buyers wanted a conforming loan (a loan that conforms to Fannie or Freddie); and conforming loans require a seasoning period of six months post close before the loan can fund. As outlined in our last article, you must be within 90 days of close to qualify as a purchase-money mortgage. So, the only loans applicable for funding post close within 90 days of purchase are non-conforming loans.
For expert guidance on your mortgage situation, please contact any one of our Mortgage Advisors at Absolute Mortgage Banking.
With the plethora of cash sales this year, we were surprised to learn that many cash buyers didn’t know that she/he could have obtained a purchase-money mortgage within 90 days of the closing date to preserve any tax advantages that a purchase-money mortgage would provide them. We also learned that many buyers were told that she/he can’t even refinance a property within 180 days of the closing date. Both of those myths are important to understand because the tax implications of obtaining a mortgage beyond 90 days of acquisition can be tremendous.*
OK, big disclaimer here: Absolute Mortgage Banking and its employees are NOT qualified tax professionals. Please seek counsel for any tax situation with a qualified tax professional. This article is purely for discussion purposes only. Ok, on to the less boring stuff…
In essence, the interest on purchase-money mortgages secured by one’s primary residence can be tax deductible up to loan amounts totaling $1.1mm. That’s a pretty big deal, even with cheap money at 4.00%, since that’s $44,000 per year that may be deducted from one’s income for tax purposes. And when you think about it, the tax-adjusted rate in this case, presuming a 40% marginal tax rate, is really 2.4%! No wonder financial planners, CPA’s, etc. recommend leveraging real estate to a comfortable level since many alternative investments exist that yield returns greater than the 2.4% in this example.*
The bottom line is that you may qualify to finance the cash purchase of a property within 90 days of acquisition to preserve the tax benefits associated with a purchase money mortgage. Please consult with your favorite mortgage professional to explore what mortgage solution is ideal for your situation.
*Absolute Mortgage Banking and its employees are NOT qualified tax professionals. Please seek counsel for any tax situation with a qualified tax professional.