Deductions for Interest When Paying Cash for a House

An all-cash offer could enable a home buyer to negotiate a stellar home price and a faster settlement date. Home sellers may encounter challenges from prospective buyers who cannot obtain a mortgage loan. If you have the resources to pay cash, you might have an opportunity to obtain the home you want for less than the asking price. You may need to decide if paying cash to procure a lower price outweighs obtaining a home loan with deductible mortgage interest.

Mortgage interest is generally charged to compensate banks and other lenders for facilitating a home loan. Lenders are largely permitted to offer interest rates that are based on in-house parameters, therefore rates vary among institutions. If you make an all-cash offer for a home, you will not require a mortgage loan. However, consumers who need a mortgage loan to buy a home are encouraged to comparison-shop several credit unions, mortgage lenders and local banks to locate a competitive interest rate.

Mortgage interest statements are typically issued to homeowners who pay $600 or more during the year toward mortgage interest. For each property owned, your lender should send Form 1098 if you paid more than $600 in mortgage interest. The amount shown on Form 1098 is the allowable amount that a homeowner may use toward his mortgage interest deduction. You should present Form 1098 to your tax preparer, if your lender sends a copy due to mortgage interest, private mortgage insurance costs or loan origination points that were paid on your home loan.

Generally, a homeowner can deduct mortgage interest up to the amount that she paid in a calendar tax year. Borrowers are eligible to deduct mortgage interest on primary and second homes for purchase or refinance transaction. You should speak with a tax adviser or a financial planner about the benefits of paying cash for a home and tax deductions that might impact your finances.

A home owner can not employ an interest deduction that was not realized. Using cash to pay for a home will negate the need for a home loan, as mortgage interest is generated based on a borrower's outstanding loan balance. You can speak with your tax professional about deducting property taxes that you may have paid.

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