Before you pay cash for a home, ask yourself if there is a possibility, at some point in the future, you might put a mortgage on the home and would want to deduct the mortgage interest on your federal tax return.
Current federal tax law allows homeowners to deduct the interest on up to $750,000 in acquisition debt used to buy, build or improve a property. When a person pays cash for a home, the acquisition debt is zero. The only way to increase the acquisition debt is to make and finance the improvements to the home.
As with many IRS regulations, there are exceptions to this rule. If a mortgage is secured on the first or second home within 90 days of the purchase closing, the debt is considered acquisition debt. The interest on the funds used to purchase the home can be deducted on up to $750,000 of the mortgage balance.
Assuming a borrower has good credit, the ability to repay the loan and the home justifies the loan, lenders are willing to make mortgages for homeowners. It does not mean that the interest on the mortgage will be deductible.
Additional information can be found in Publication 936, Home Mortgage Interest Deduction, of the Internal Revenue Service at IRS.gov.
To deduct home mortgage interest, you must file Form 1040 or 1040-SR and itemize deductions on Schedule A. The mortgage must be secured debt on a qualified home in which you have an ownership interest. Interest on home equity loans is only deductible if the borrowed funds are used to buy, build or substantially improve the taxpayer’s home that secures the loan.
If you answered yes or even maybe to the question first posed in this article, contact your tax professional to determine the best way to approach your individual situation. For more information, download the Homeowners Tax Guide.