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Are You Buying A Home With All Cash? Here’s Why You Should Reconsider

Are You Buying A Home With All Cash?  Prepare to Be Scrutinized

Buying a home with all cash has become more difficult. Blame the drug dealers, criminal networks and tax evaders for new rules put forth by the U.S. Treasury Department’s Financial Crimes Enforcement Network (or Fincen).

Title insurance companies must now identify a 25% or greater owner of an LLC or corporation that purchases a home for at least $300,000 using all cash or crypto currency. The rule applies to 22 counties nationwide, and the list keeps expanding. It started in Manhattan and Miami. Now the counties in and around Los Angles, San Francisco, Boston, Seattle and San Diego, among others, are also included.

Of course, there are good and legal reasons for using an LLC to hold title to real estate, including limited liability, privacy and estate planning strategies. And many will use bank financing to leverage the advantages of real estate investment. Using a mortgage as part of the purchase does not subject one to the new rules.

Another gap in the law involves the use of trusts. Holding title in the name of a revocable or irrevocable trust is not subject to reporting either. While using an irrevocable trust for real estate holdings may not be the best tax planning strategy (talk to your CPA) many targeted persons may consider this option.

Another strategy will simply be to purchase real estate outside one of the 22 identified counties. Drug dealers already like Eureka, California, in the heart of the marijuana grow zone. The rules don’t apply there. Yet. Experts expect that the rules will someday apply to all real estate throughout the United States.

If you are not engaged in any sort of criminal activity should you be bothered by these rules?

Fincen collects the information on true ownership of the LLC or Corporation. This is added to their database, which they assert is not public. However, once you are in the database anything they deem as “suspicious activity” is scrutinized. Using cash transactions of over $10,000, or a number of $9,000 cash transactions, can put you in Fincen’s crosshairs. What then?

The government certainly has an interest in going after criminal activity. But, as always, broad rules can lead to unintended consequences.

New Rules for HELOCs

Your Home is No Longer a Full Service Tax Deducting ATM

Have you ever tapped the equity in your home to pay for a new car or a college tuition? With a HELOC, also known as a home equity loan or line of credit, you could do so. Better yet, you could deduct the interest you paid on those loans on your tax return.

The new tax law has changed all of this (at least through 2025, when this portion of the tax law expires). With over 14 million HELOCs borrowing over $500 billion, the new rules affect many Americans for the tax year starting 2018.

You can still tap into your home’s equity for whatever you want. But under the new tax law, you can’t deduct the interest in every circumstance. And there are limits on how much you can deduct even if you are using the money correctly.

What is a proper usage for an interest deduction?

Borrowings used to “buy, build or substantially improve” your home are accepted. Fast cars are not. (But again, you can still buy the car and just not deduct the interest.)

The borrowing must be used to improve the house securing the loan. So you can’t use a HELOC on your primary residence to improve a vacation home.

Interest can only be deducted on the total debt of up to $750,000 for up to two homes. If you had a debt of up to $1 million on one or two homes before December 15, 2017 (the last date before the tax law changed) you can still deduct the interest if the money was used to improve, build or buy a home.

How does the $750,000 limit come into play?

Let’s say John has a $700,000 mortgage on a primary residence and borrows $100,000 on a HELOC to make improvements on that property. His total borrowings are now $800,000. John can only deduct interest on the first $50,000 of the HELOC. The remaining $50,000 in interest is over the $750,000 limit.

Mary has a primary residence and a vacation home. Her residence has a $300,000 mortgage on it with the vacation home having a $200,000 mortgage. Her total borrowings are $500,000. Mary then borrows $100,000 against each property. The money borrowed against her primary residence goes for improvements on that property. Likewise, the $100,000 vacation home borrowing is used for a landscaping project on that property. Mary’s total borrowings are now $700,000. Because she used the money the right way on each property she can deduct the full amount of interest on the $700,000 in loans.

There is another wrinkle to be aware of here. You can only deduct interest on a HELOC of up to $100,000. And that HELOC deduction is limited to the price you paid for the property.

Let’s say you bought a Detroit fixer-upper for $50,000. Somehow, you are able to get a HELOC on it for $75,000 so you can completely remodel it. You can only deduct interest on the first $50,000 of the loan, because that is what you paid for the place.

Once again, the tax law benefits single persons. Two singles could deduct a combined $1.5 million in mortgage debt ($750,000 each) if they bought a home together. Married couples are limited to the $750,000 amount.

Of course, record keeping becomes important in this arena. You’ve got to be able to prove all of this up to the IRS. Track your spending and save all of your invoices. If you don’t already have one, consider using a bookkeeper to assist with it. Save these records for a good long time. The IRS may take years to get at any audits on this. You may need to be prepared into the distant future.