The “90 Day Rule.” What Home Buyers Need to Know When Purchasing “All Cash.”

 

For the past few years, local Realtors have seen a large number of properties being purchased with cash.  While many of these buyers have been foreign investors, many have been New Yorkers, flush with cash, looking to trade up or trade down.  These buyers may have assumed it’s easier to purchase “all cash” and worry about possibly obtaining a mortgage later.  These same cash buyers are likely unaware that the IRS views differently what is considered “Acquisition Debt” versus “Home Equity Debt.”

 

What is “Acquisition Debt” and Why Does It Matter?

Any mortgage used to purchase, build, or improve a primary or vacation home qualifies as “Acquisition Debt.”  A mortgage that is used for any other purpose is defined as “Home Equity Debt.”

 

There are times when a buyer must “rush” to close using cash, even when it was their intention to finance their purchase.  For these buyers, the IRS allows a 90-day window to obtain their mortgage financing and recoup the cash they laid out.

 

However, if a purchase-money mortgage on your primary or vacation home is NOT obtained within 90 days of the purchase closing, any mortgage on the property obtained in the future that is NOT used specifically for home improvements will be considered “Home Equity Indebtedness.”  This means:

 

• You may NOT be able to deduct any interest at all if you are subject to the Alternative Minimum Tax (AMT).
• If you are NOT subject to the AMT, you will only be able to deduct the interest on up to $100,000 of the mortgage balance.

 

On the other hand, if you DO put a mortgage on your primary or vacation property within the 90 day window and qualify for “Acquisition Indebtedness:”

• You can use the funds for any purpose you wish, such as investments, retirement needs, college costs, living expenses, even estate planning!
• You can deduct the interest on up to one million dollars of the mortgage balance, regardless of whether you are subject to the AMT.

 

From a Realtor’s perspective, a cash buyer is the best buyer.  The transaction is smoother and there’s no mortgage financing to slow the process.  I wouldn’t expect a Realtor to discourage a cash purchase.  But I do believe these tax implications should be explained to every home buyer.  Then, buyers can consult their tax and investment professionals in order to make an informed decision.  If a mortgage is found to make financial sense, it can still be obtained without jeopardizing the “all-cash” closing.

If you’re involved in an “all-cash” home purchase, let’s have a conversation to evaluate whether a mortgage makes financial sense.  I’d be happy to discuss your situation with your CPA and Financial Planner.  If you don’t have a CPA or Financial Planner, I’d be happy to make an introduction for you!  Together, let’s ensure your mortgage (or lack of one!) matches your cash flow needs and helps you obtain your financial goals.

 

DISCLAIMER:  This overview is provided for informational purposes only and does not constitute legal, tax, or financial advice.  Please consult with a qualified tax advisor for specific advice pertaining to your situation.  For more information on any of these items, please reference IRS Publication 936.

 

Warren Goldberg is President of Mortgage Wealth Advisors, a Certified Mortgage Planning Specialist®, and a published author. His interviews include Blog-Talk Radio, Newsday, and the Long Island Herald. Since 1992, he’s been sharing his financial knowledge and wealth-building strategies, including how to properly use your mortgage as a financial tool. His clients regularly express their trust and appreciation by recommending friends and family call when in need of mortgage, real estate, and financial guidance.