There are lot of real estate buyers out there putting cash ahead of leverage. Good for the seller, not always good for the buyer. Here is a little known tax fact that will bring an unwelcome surprise when those same cash buyers refinance to pull their cash out, and look forward to their mortgage interest deduction (which will be limited by a number of factors); THEY WILL NOT BE ABLE TO TAKE IT!
Here is how mortgage interest works:
You can deduct interest related to acquisition indebtedness up to $1 million dollars when the debt is secured by the principal residence. The debt must be your obligation. New debt you incur to refinance the acquisition indebtedness also qualifies as a deduction but only up to the amount of the refinanced debt.
If you purchase a home with cash, you do not acquire any acquisition indebtedness. Therefore, should you decide to put a loan on the property, it would not be deductible –since the home was originally bought with cash. If there is no original acquisition indebtedness, you will not receive the deduction you are hoping for.
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