Acquisition Debt

  • April 09, 2015

As tax season comes to a close, we focus on those benefits the IRS allows you so that you can maximize your deductions and reduce your total personal tax liability.   
As a homeowner, the interest you pay on your mortgage is deductible, with limitations, and is one of the greatest benefits to owning a residential property.  These benefits apply to interest paid on secured loans used to build, acquire or improve your main or second home.  If you are planning on buying a new home with cash in the near future, you should also consider taking out a mortgage soon after in order to take full advantage of the tax deductibility benefits. 
You have up to 90 days to accomplish that in order for the IRS to consider your new mortgage acquisition indebtedness.  That’s important to you because mortgage interest paid on acquisition indebtedness is deductible up to $1 million, whereas interest paid on home equity indebtedness is deductible to only $100K. This is a significant difference in interest you can claim on your taxes, not to mention a much greater amount of cash being put back in your pocket.
For example, consider the following: “You bought your main home on June 3 for $175,000. You paid for the home with cash you got from the sale of your old home. On July 15, you took out a mortgage of $150,000 secured by your main home. You used the $150,000 to invest in stocks. You can treat the mortgage as taken out to buy your home because you bought the home within 90 days before you took out the mortgage. The entire mortgage qualifies as home acquisition debt because it was not more than the home's cost.”
Having a candid conversation with your CPA or tax preparer regarding your financial plans for the future is important and can make a significant difference with reducing your total tax liability.
Publication 936 (2014), Home Mortgage Interest Deduction

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