Paying cash for a home seems like a huge advantage to qualifying for a mortgage and an appraisal. However, for the fortunate few who don’t need a mortgage, there is a question they should answer before they make that decision: Do you think at any point in the future, you might put a mortgage on this property?
It’s important because paying cash for a home could affect the ability to deduct the interest if the homeowner should place a mortgage on the home at a later date.
Most homeowner’s know they can deduct the interest on up to $1,000,000 of acquisition debt on their principal residence but they may not understand the limitations of such debt.
Acquisition debt is the amount used to buy, build or improve a person’s principal residence. The amount is not static but changes over time. An amortized loan reduces the principal owed with each payment made and the acquisition debt is reduced accordingly. If a person stays in a home long enough to retire the loan, the acquisition debt is reduced to zero.
Our current federal law allows a homeowner to deduct the interest on the acquisition debt plus the interest on up to an additional $100,000 home equity debt. If a person pays cash for a home, the acquisition debt would be zero and the only interest deduction allowed would be for home equity debt.
If you answered yes or even maybe to the question, before you pay cash to buy your home, you should discuss your situation with your tax advisor.