Pay Cash | Things You Should Know
May 5, 2018 | Tom Ashworth
If You Pay Cash You Should Know This
It would seem that if you pay cash would be have a big advantage over getting a mortgage and having to deal with an appraisal. If you find yourself fortunate enough to be in this situation, then you should ask yourself if at any point you would need to get a mortgage on this property.
The reason this is important is that if you pay cash for the home it could affect the ability to deduct the mortgage interest from your taxes.
Many homeowners’ understand that they can take a tax deduction on the interest on up to 1 Million Dollars of the debt on their main residence. I wonder do they comprehend the limitations of the debt?
Acquisition debt is the dollars that are used to buy or build or improve a person’s main residence. The amount is very dynamic. When a loan is amortized the loan principal will reduce each time a payment is made. That means the acquisition debt is lowered accordingly. If a person pays on the loan till the end of the mortgage then the acquisition debt would be zero.
Currently federal law allows the homeowner to deduct interest paid on the acquisition debt, plus interest up to $100,000 in the home equity debt.
If you pay cash for your home, the acquisition debt is nothing. You get no tax deduction, which essentially can make your taxable income larger. Then you pay more taxes. This can especially be true if it bumps you into a new tax bracket.