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 to buy a home, supply has been low and demand has been strong, leading many buyers to sweeten the deal—at their own risk—by waiving inspections and mortgage contingencies, among other concessions, to stay competitive with other bidders.
A silver lining to this real estate frenzy was that it was partially driven by an environment of low interest rates. Buyers were able to finance purchases at historically low mortgage rates, making the higher prices a bit easier to tolerate.
With the Federal Reserve looking to combat soaring inflation, interest rates have risen rapidly in the past year or so. As a result, mortgage rates have skyrocketed in lockstep. As of September 2023, the average 30-year U.S. fixed mortgage rate topped 7%.1 By contrast, the average 30-year U.S. fixed mortgage rate in January 2021 was only 2.65%.2
For those who need to finance (which is most people), today’s high cost of borrowing makes purchasing a home more expensive—or even potentially prohibitive. For those in the market for a high-end luxury home, the cap on the mortgage interest deduction will limit any tax savings.
An opportunity to reduce taxes
In a highly competitive and expensive real estate market, how can buyers make attractive offers while keeping costs as low as possible? For one, smart tax planning can help buyers fully deduct mortgage interest beyond the current $750,000 cap. For those interested in buying a high-end luxury home, 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 a significant tax break: the investment interest expense deduction. This pertains to interest incurred on debt used to acquire investment property, and there’s no cap to this deduction.
The tax code is complex, but the takeaway here is that certain buyers may utilize current tax code to deduct interest from a mortgage without limit. This strategy requires sophisticated planning, but the tax savings can more than compensate for the required work. It’s 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’re a potential home buyer with the following three characteristics, this strategy should be considered:
- Ability to initially close on the purchase with cash (or by temporarily utilizing an investment portfolio)
- Desire to obtain a mortgage in excess of $750,000
- An objective of investing the initial cash needed after the purchase/mortgage is completed
For many people, this strategy can be employed with little disruption to their investment portfolios.
If you find yourself in the housing market and meet the criteria above, please discuss with your Corient Wealth Advisor whether your situation qualifies to make use of this compelling tax break.
1 https://www.forbes.com/advisor/mortgages/30-year-mortgage-rates/
2 https://www.businessinsider.com/personal-finance/average-mortgage-interest-rate
ABOUT THE AUTHOR
Jonathan Gulman, CPA
Jonathan is a Wealth Advisor in our New York City office. He is responsible for advising clients on portfolio construction and asset allocation, as well as integrating investment, tax, estate and cash flow planning into their wealth management plan. He also serves as a member of the firm’s Investments team.
Jonathan joined legacy firm RegentAtlantic as part of the combination with Hillview Capital in 2019 and was a wealth advisor with Hillview for five years. Prior to joining Hillview, Jonathan was an account manager at Northern Trust in their Private Wealth Management group, delivering comprehensive wealth management solutions to ultra-high net worth clients, including investment management, wealth advisory, financing, and trust and estate Planning services. Jonathan holds the CERTIFIED FINANCIAL PLANNER™ certification and is also a CPA. He initially began his career in public accounting at WeiserMazars, LLP, a mid-sized regional firm based in New York City.
Jonathan earned his BA and Master of Accounting from the University of Michigan. He lives in Westchester, NY, with his wife, Allison, and their daughter. A Boston-area native and avid sports fan, he enjoys visiting family and friends in Massachusetts and catching a local game.
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