THE 90-DAY WINDOW FOR CASH BUYERS: HOW IT WORKS & WHY IT MATTERS
Do you have a cash buyer? In this season, we have seen more cash opportunities that in the past. Buyers may want to pay cash to compete, or maybe because they really don’t want a mortgage payment, either way, there are some IRS implications to paying cash |vs| using a mortgage to acquire their home.
You, the Realtor, can be of tremendous value to them by providing some of the information below! Here’s some things to consider when dealing with a cash buyer!
The IRS gives a 90-day window to put a mortgage on a property and gain the tax benefits associated with the coveted “acquisition indebtedness” status.
WHAT IS “ACQUISITION INDEBTEDNESS” AND WHY DOES IT MATTER TO THE BUYER?
Any mortgage that is used to buy, build, or improve a primary or vacation home qualifies for “acquisition indebtedness” status. If they itemize tax deductions, interest can be deducted up to $750,000 of acquisition indebtedness.
IS THERE A DEADLINE TO QUALIFY FOR THE TAX BENEFIT?
Yes! The Buyer must put a mortgage on their primary or vacation property within 90 days of the purchase closing date in order to qualify for the special “acquisition indebtedness” status.
WHAT IF THEY WAIT UNTIL AFTER 90 DAYS?
The Buyer will lose the special tax benefits associated with the “acquisition indebtedness” status. Any mortgage put on a primary or vacation property in the future will not qualify for a tax deduction unless the funds are specifically used for home improvements on that house.
OKAY, SO THE TAX BENEFIT IS LOST… BUT WHY WOULD THE BUYER WANT A MORTGAGE ON THE PROPERTY IN THE FIRST PLACE?
With interest rates being so low right now, the cash could use the funds for any number of reasons including:
Investment – the buyer and their financial advisor can find a safe investment that yields more than the after-tax cost of the mortgage?
College funding for their children or grandchildren – this could assist the buyer in making an impact and leaving a legacy for their family.
Eldercare needs – Would they have enough set aside to care for themselves and \ or loved ones as they age?
Vacation home or Investment property purchases can make excellent use of large down payments and smaller loans but neither being paid in full – taking advantage of tax breaks and resulting in multiple purchases.
DOES THE “90 DAY RULE” ALSO APPLY TO INVESTMENT PROPERTIES?
No. Investment properties have different rules, deadlines, and guidelines that must be followed.
Remember, if the buyer decides to wait and use a mortgage to do any of these things in the future, (AFTER the 1st 90 days of the purchase closing ) they won’t be able to deduct the mortgage interest. It may be worthwhile to put a mortgage on the property now, get the tax break and then put the funds aside until they are able to make educated decisions on what to do with cash.
Using this “90 Day Rule” information as an added value for your cash buyers could make you their realtor for life.
PLEASE NOTE: THIS LETTER AND OVERVIEW IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE LEGAL, TAX, OR FINANCIAL ADVICE. PLEASE CONSULT WITH A QUALIFIED TAX ADVISOR FOR SPECIFIC ADVICE PERTAINING TO YOUR SITUATION. FOR MORE INFORMATION ON ANY OF THESE ITEMS, PLEASE REFERENCE IRS PUBLICATION 936.
Source: CMPS Institute