if buy princ residence for cash and then refi

If taxpayer purchases a home in Aug 2020 for 500k.

Pays cash for property.

If in 2021 or later, they decide they overextended themselves and want to
go get a mortgage on this property, let's say for 400k....i told them
the interest on that refinance will not be tax deductible bc

they didn't buy, build or improve their property with those proceeds

Correct?

There's a time period under which it is considered acq debt...six months? Someone knows.

They have 90 days to refinance after purchase.

good info..ty...did not know that...but if htey wait more than 90 days they are out of luck and can't deduct the interest, correct?

Not as qualified residence interest, but there's this thingy called, maybe, an (o)(5) election out of that treatment. So it becomes relevant to knowwhat they plan to so with the $400k.

is that income tracing?

the client was saying i'd like to pay all cash now

but if in a year or later from now, i change my mind and want to finance the house they are
buying next week, can they refi and deduct the interest and i said no.

they would just want the cash to be in their checking acct ro invest in stock market

More like use of proceeds tracing. Lots of stuff on it, on TPT and generally.

It’s called interest tracing - If they are worried about the interest deduction, they should borrow the money now to make the purchase, and if they don’t like the loan they can use their cash and pay it off next year

good info..ty...did not know that...but if htey wait more than 90 days they are out of luck and can't deduct the interest, correct?

Well, I think we should consider the source of that 90-day rule and all other relevant matters. See Post #20 here and thereafter. Read carefully.

viewtopic.php?f=8&t=14203&p=128660&hilit=fixing+a+mortgage+interest#p128660

The "Spirit of the law" as I see it- is that you can purchase a home for cash (whether for speed or acquisition, inability to finance, or a myriad of other reasons, and then (within 90 days) (re)finance the purchase with a loan.

Some houses are "cash only transactions" due to the repairs of the building (or other remediation) needed at the time of purchase. Those transactions seem to be the type of thing this exception is made for. What I believe it is not made for is when you bought a house for cash, and later want to treat it as an ATM with deductible interest for whatever reason. At that point it would be like the old LOC's that the interest was deductible no matter what the proceeds were used for.

Dumb question....why wait to finance? With the rates the lowest in our lifetimes, it would be idiotic a year from now to go, oh, I guess we'll borrow after all....duh.

It won't be deductible for fed, but interest on equity loan (that this is) may be deductible for state tax. For example, in CA the tax law did not change and one can still deduct interest on the first $100k borrowed against equity, no matter how it's used.

Maria U. Ku, CPA
Oakland, CA

It won't be deductible for fed .... Despite post # 20 and post #5?