Consider This Before You Pay Cash for a Home

Consider This Before You Pay Cash for a Home

Consider, before paying cash for a home, if at some time in the future you would want to add a mortgage on the home and want to deduct that mortgage interest on your federal tax return.

The current federal tax law allows homeowners to deduct the interest on up to $750,000 in acquisition debt that is used to buy, build, or improve a property. When a buyer pays cash for that home, the acquisition debt becomes zero. The only way to then create acquisition debt is by financing improvements or renovations to the home.

Like with many of the IRS regulations, there are exceptions to the rule. Within 90 days of purchase closing, if a mortgage is secured on the first or second home, it is considered acquisition debt. The interest on the funds used to purchase the home can then be deducted up to $750,000 of the mortgage balance.

Lenders are willing to make mortgages for homeowners, assuming a borrower has good credit and the ability to repay the loan and that the home appraises well. But that does not mean 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

You must file Form 1040 or 1040-SR and itemize deductions on Schedule A to deduct home mortgage interest. 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.

As usual, I recommend you contact your tax professional to determine the best way to approach your individual situation.  With the continued increase in the Federal Standard Deduction for taxpayers there may be a question as to whether home interest is a viable tax deduction or not. For more information, download the Homeowners Tax Guide.

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