Before deciding if you should purchase a home with cash, think about whether you may have to put a mortgage on the home in the future. Mortgage interest on homes can only be deducted if it is an acquisition debt or an equity debt.
If you decide after buying a home to add a mortgage to the property, you may not be able to deduct that interest. Therefore you lose any tax savings.
Did you know you can deduct mortgage interest paid up to $1,000,000 of an acquisition debt on your principle residence? The definition of acquisition debt is any amount you used to buy, build or improve your principle residence.
This amount, however, is not static and will change over the life of your loan. As you make your monthly payment on your amortized loan, principal owed reduces as well as the acquisition debt. If you stay in your home long enough to pay it off, then your acquisition debt reduces to zero and so does any tax savings.
Current federal law allows you, the homeowner, to deduct your mortgage interest on the purchase of your home but also allows you to deduct up to an additional $100,000 for a home equity loan. So there is a possibility to double your tax savings by using both.
However, if you pay cash up front for the home, the only tax savings available to you would be that of the home equity loan variety. I do suggest before making a home purchase that you always consult with your tax advisor or tax attorney for advice.
Need to find a home to purchase to take advantage of all these tax savings? Contact me and I can send you a list of Fairfax homes for sale that will fit the bill.