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Property Financing: How to Find Potential Tax Savings

The Real Estate market, particularly residential housing, has seen tremendous growth over the past few years. For those looking for homes, supply has been low and demand has been strong, necessitating many buyers to sweeten the deal by waiving inspections and mortgage contingencies, amongst other concessions to stay competitive.

A silver lining to this frenzy was that it was partially driven by a low interest rate environment. Buyers were able to finance purchases at historically low rates, making the higher prices a little bit easier to tolerate.

With the Fed looking to combat inflation, interest rates have risen rapidly in 2022. As a result, mortgage rates have gone up in lockstep. As of June 2022, the average 30-Year US mortgage rate topped 6%. By contrast, in 2021, the average 30-Year Mortgage was below 3%.

For those financing, the cost to borrow makes purchasing a home even more expensive. For those in the market for high-end, luxury homes, the cap on the mortgage interest deduction limits any tax savings.

In a highly competitive, expensive market, how can buyers make attractive offers while keeping costs as low possible? For one, smart tax planning can help buyers fully deduct mortgage interest beyond the current $750,000 cap. For those searching for high-end, luxury homes, the tax savings can be enormous.

While the Tax Cut and Jobs Act in 2017 eliminated many itemized deductions and reduced the mortgage interest deduction cap, one significant itemized deduction remained that allows for significant tax deductions: Investment Interest Expense. This is interest incurred on debt used to acquire investment property, and there is no cap to this deduction.

The tax code is complex, but the take-away here is that certain buyers can utilize current tax code to deduct interest from a mortgage without limit. This strategy requires sophisticated planning, but the tax savings can more than make up for the required work. It is important to note that the home purchase must initially be made in cash, which also may make the purchase offer more appealing to sellers. If you are a potential home buyer with the following characteristics, this strategy should be considered:

  1. Ability to initially close on the purchase with cash (or by temporarily utilizing an investment portfolio)
  2. Desire to obtain a mortgage in excess of $750,000
  3. An objective of investing the initial cash needed after the purchase/mortgage is completed

For many, this strategy can be employed with little disruption to their portfolio.

If you find yourself in the housing market and fall under the criteria above, please discuss with your Financial Advisor whether or not your situation qualifies to make use of this tax break.

Important disclosure information

Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable.

Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.

This article is not a substitute for personalized advice from RegentAtlantic. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.

RegentAtlantic does not provide legal or tax advice. Please consult with a legal and or tax professional of your choosing prior to implementing any of the strategies discussed in this article.

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