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What do cash buyers want to know about IRS tax deductibility laws?

I just learned something regarding current financing from a colleague of mine, Ephraim Schwartz, a Partner at O’Dette Mortgage Group, that I thought was worth sharing. As competition has increased for north Tahoe’s best vacation homes, so has the number of all-cash buyers.  Some cash buyers plan to complete a cash-out refinance down the road, pulling out equity after the property is secured, in order to capitalize on the opportunity to leverage against historically low interest rates, and into other well performing investments.  This can be an excellent strategy, but it’s paramount to keep IRS tax deductibility laws on the radar. The IRS categorizes mortgage debt into two buckets; purchase and cash-out refinance, and the tax deductibility differs significantly between the two.

Here’s what cash buyers want to know:  The IRS tax code allows cash-out refinance mortgage debt to be categorized as purchase mortgage debt, if, and only if, the cash-out refinance is completed within 90 days of the close of escrow.  The significance of this rule cannot be overstated.  Consider a $500,000 mortgage, on a 30 year fix at 4.5%, maintaining that tax deductibility is worth over $120,000 to an individual in a 30% tax bracket.  I’m not a CPA and I’m not a mortgage broker, but I found this information to be helpful and significant enough to share with you. As always, I advise you to consult with a CPA or lender to get the specifics on tax and financing related issues.