Cash Buyers Should Know These Answers

warning-cash-buyerIt would seem that cash buyers 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 main 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, but 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, so 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 will allow the homeowner to deduct interest paid on the acquisition debt, plus interest up to $100,000 in the home equity debt.

So if you pay cash for your home, the acquisition debt is nothing, therefore you get no tax deduction, which essentially can make your taxable income larger, so you pay more taxes. This can especially be true if it bumps you into a new tax bracket.

As always, we are Smart Path Realty advise you to discuss this over with your tax advisor. Obviously, if you decide to pay cash or finance your home we at Smart Path are here to serve.

A 1031 Exchange Means you can Invest More

A 1031 exchange for rental and investment real estate is a tool that allows investors to move  the gain from one property to another without immediate income tax consequences.

An instant benefit is to postpone the tax due which gives the investor a larger amount of proceeds to invest.  In the example shown, the investor has 21% more proceeds to invest and grow over time than if he had paid the taxes due instead of exchanging.

1031 Exchange Means You Can Invest MoreA legitimate long-term goal might be to make qualified exchanges from one property to another until the investor dies.  The heirs would then receive a stepped-up basis on the property based on the market value at the time of the decedent’s death and possibly avoiding taxes altogether.

There are specific requirements to be met in order for the exchange to qualify. For more information on exchanges, see IRS publication 544.  In addition to enlisting the services of a real estate professional familiar with investment property, seek the help of Qualified Intermediary to facilitate the intricacies of the exchange.  Your real estate agent can help you locate one.

One thing you should alway do is to discuss any  1031 Exchange with your Tax advisor.  If you need help with a 1031 Exchange then our team of awesome licensed agents are here to serve you.