How Delayed Financing & Investment Deductions Help Luxury Home Cash Buyers

Many mortgage and financial planning professionals know that the IRS allows taxpayers to deduct qualified residence home mortgage interest up to $750,000 (combined) and the IRS also allows taxpayers to deduct interest from investment loans. But we know homes in the DMV are higher than the national median price, so it’s not unheard of for buyers to pay more than $750,000 for a primary residence.

Client Scenario 1

Let’s say your client wants to make a competitive offer so they pay for the property in cash. They could then do delayed financing to pull the equity out of the house. Many financial advisors may advise the client to avoid taking out more than $750,000 because the mortgage interest rate tax deduction limit is $750,000. However, with the 90-Day Rule, the homeowner could refinance the property to take out $1 Million and put the leftover $250,000 in investments because qualified investment interest is tax deductible.
The buyer gets to make a return on their money in the market and write off their mortgage interest each year.

Client Scenario 2

Here’s another scenario.

One of your clients paid $1.5 Million in cash for their primary residence. Later, they decide to mortgage their home through delayed financing and use the cash to fund other investments. They deduct the mortgage interest up to the $750,000 limit, and put $750,000 into qualified investments to deduct interest on the last $750,000 of the loan.

Restrictions Do Apply

• Buyers who finance a home cannot get a cash-out refinance mortgage for six months, but buyers who pay in cash are not subject to that rule. However, cash buyers who do delayed financing must do so within six months of the settlement date.
• The refinance cannot be for more than the purchase price of the home plus closing costs, prepaid points, and fees.
• IRS rules about investment income versus interest apply; if your client did not earn investment income for that tax year, they cannot deduct interest on the tax return. However, your client can carry the deduction over into a future tax year and claim it when they have investment income to report.
• There are restrictions on what you can “invest” in with the cash proceeds. For example, your client cannot use that money to invest in single-premium life insurance, annuities, or tax-free investments like municipal bonds because investment interest is only deductible against taxable investment income.

Don’t worry — we will walk through all of this and more when we discuss scenarios for your clients.

Our Next Step

Look through your database to find clients who paid cash for a property within the past three months. Once you find them, send me an email at Leo@Anzoleaga.com and we’ll discuss the specifics of their situation from there!