This post will try to explain the horrors of IRS Code Section 962, which pertains to cash home buyers and their deductions of interest and expenses when buying a home for all cash. Simply stated, “Be prepared” is always a good suggestion when it comes to dealing with the IRS.
Did You Know that Congress Amended the Mortgage Interest Deductions Rules to Require Anyone Paying all cash when purchasing a home and places financing on the home within 90 days of the close of escrow will permanently lose their opportunity to deduct the interest. The only exception to that rule is given to Home Equity Loans taken out, which are to cover the expense for provable home improvement to the home and there are rules you will find in I.R.S. Publication 962. Excerpts from that code are shared by clicking the link in the next sentence..
Home Mortgage Interest Deductions Excerpted From I.R.S. Publication 936 (2015) Home Acquisition Debt Home acquisition debt is a mortgage you took out after October 13, 1987, to buy, build, or substantially improve a qualified home (your main or second home). The home financing must be secured by that home.
If the amount of your mortgage is more than the cost of the home plus the cost of any substantial improvements, only the debt that is not more than the cost of the home plus improvements qualifies as home acquisition debt. The additional debt may qualify as home equity debt.
Is My Home Mortgage Interest Fully Deductible? (Instructions: Include balances of ALL mortgages secured by your main home and second home.)
Do you meet the conditions 1 to deduct home mortgage interest?
Were your total mortgage balances $100,000 or less 2 ($50,000 or less if married ling separately) at all times during the year?
You cannot deduct the interest payments as home mortgage interest.
Go to Part II of this publication to determine the limits on your deductible home mortgage interest.
Were your grandfathered debt plus home acquisition debt balances $1,000,000 or less 3 ($500,000 or less if married ling separately) at all times during the year?
Were your home equity debt balances $100,000 or less 2 ($50,000 or less if married ling separately) at all times during the year?
Your home mortgage interest is fully deductible. You do not need to read Part II of this publication.
Were all of your home mortgages taken out on or before October 13, 1987? Were all of your home mortgages taken out after October 13, 1987, used to buy, build, or improve the main home secured by that main home mortgage or used to buy, build, or improve the second home secured by that second home mortgage, or both?
1 You must itemize deductions on Schedule A (Form 1040). The loan must be a secured debt on a qualified home. See Part I, Home Mortgage Interest.
2 If all mortgages on your main or second home exceed the home’s fair market value, a lower limit may apply. See Home equity debt limit under Home Equity Debt in Part II.
3 Amounts over the $1,000,000 limit ($500,000 if married ling separately) may qualify as home equity debt if they are not more than the total home equity debt limit. See Part II of this publication for more information about grandfathered debt, home acquisition debt, and home equity debt.
See Table 2 in Part II of this publication on page 14 for where to deduct other types of interest payments.
4 Were the mortgage balances $1,000,000 or less ($500,000 or less if married ling separately) at all times during the year?
If you pay all CASH for a home either to flip or just move into the IRA says you can NOT write any interest for your home if you re-finance within 90 days from the close of your escrow.
Cash is still king. However, if you think you can pay all cash, close in 10 days and as-is so your offer will be viewed by the home sellers as a “sure thing” you better not need that cash for at least 90 days or you will lose one of the last bastion of a tax write off to the average home-buyer.
Be careful and think when you spend your hard earned cash.
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