Tax deductions for loans acquired after auction purchase?


#1

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”?


#2

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.