I understand that purchase money loans are tax deductible up to $1,000,000 and home equity loans are limited to $100,000.
Does this apply to homes purchased with cash at auction? For instance, if I intend to occupy the home purchased and get a subsequent loan after purchasing at auction, will my loan be considered a “purchase money loan” or “home equity loan”?
Disclaimer: Check with your CPA since I am not a tax advisor.
I assume this is for your primary residence? If so, the info below applies. If it’s an investment prop (rental or flip) then totally different rules apply.
I am in the same boat and IRS publication 936 “Home Mortgage Interest Deduction” is pretty explicit with specific examples on this issue. In order for a loan to be considered purchase money it must close within 90 days of property acquisition. Calling around, I’ve found that all the lenders I’ve talked to will not finance a property you paid cash for until you’ve had it for 6-12 months (due to title seasoning requirements) according to the lenders this is FNMA underwriting guidelines. Also, when you finance after paying cash, it will be considered a cash out refi and you’ll have a slightly higher rate than purchase money.
The only way around the issue I’ve thought of would be to get a hard money loan within 90 days (that’s do-able), that would qualify you for the 90-day rule and then you can rate and term re-fi to a conventional mortgage after you’ve been in the property for 6-12 months. That’s not cheap though, hard money loans cost 5 points upfront and 12% APR in my neck of the woods. I think you could get away with hard money financing 100k less than your goal end financing amount and then cash out refi and you’d have X dollars purchase money (whatever you got the hard money loan for) + 100k in home equity cash out which would still be deductible per IRS rules.
The other option would be to find a local smaller lender who will do a portfolio loan and would give you financing within 90 days.
Good luck. Let me know if you find a lender who will give you a conventional mortgage within 90 days at a decent rate.
In general, tax deductions for loans acquired after an auction purchase may be available depending on the purpose of the loan and how the auction property is used. For example, if the property is purchased for business purposes and the Home Equity Loans is used to finance the purchase, then the interest on the loan may be tax deductible as a business expense.