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.