Many individuals have seen their portfolios rise significantly over the last few years, and as a result of such increase in wealth, many homeowners are paying cash for their homes and foregoing mortgages. As a result of these no mortgage purchases, homeowners are foregoing large interest tax deductions they could have received had they purchased their homes with a mortgage. Buyers who pay cash for their homes typically purchase more expensive homes, have larger mortgages and are generally in higher tax brackets so they would receive a greater benefit from the home mortgage interest deduction.

Generally, personal interest deductions are not allowable under the Internal Revenue Code. One major exception to this rule is interest on a "qualified residence". A qualified residence is a principal residence and one other residence selected by the taxpayer and used as a residence for the greater of 14 days or 10% of the number of days it was rented. 

Interest deductions on principal residence debt are divided into "acquisition indebtedness" and "home equity indebtedness". Acquisition indebtedness is debt that is secured by a residence when the money is used to buy, build or substantially improve a qualified residence. Home equity indebtedness is debt secured by the residence but the loan proceeds can be used for any purpose. There is a limit of 1 million dollars on acquisition indebtedness and $100,000 on home equity indebtedness.

Often times, there are personal issues, tax reasons or other circumstances that prevent a home buyer from mortgaging the property and instead paying cash for the home. Fortunately current law provides some relief for individuals who purchase a residence in cash and want to later finance a portion of the residence and pull some equity out of the home. These individuals can secure the home interest deduction if the mortgage is secured by the home and the mortgage is taken out within one of the following time periods:

• within 90 days before or after you purchase the home, or
  
• within 90 days after a construction or improvement is completed, but the mortgage cannot exceed the expenses incurred during the period beginning 24 months before the completion and ending on the date of the mortgage.

For example, an individual purchases a residence for cash on January 1, 2001 for $500,000. On March 15, 2001, the individual takes out a first mortgage of $400,000 secured by the home. The individual could treat the $400,000.00 mortgage as taken out to buy the home because the mortgage was taken out within 90 days of the purchase. As such, the interest paid on the mortgage would be deductible.

In summary, homeowners who are aware of the time limitations for home mortgage interest deductions and properly structure their borrowing have a valuable deduction available to them.

Our office is well able to assist you in this effort should the need arise. We are glad to explain our services in this area more fully and provide you with the costs associated with our representation. If you or anyone you know falls within these circumstances, it is wise for them to consult with our office to resolve these matters.