The main problem with cashing out the equity in your primary home to buy a vacation home is that you lose the tax deduction on the mortgage. Mortgage interest is only deductible if you itemize your tax deductions AND if the mortgage proceeds are used to buy, build or improve a “qualified residence”. Here’s the catch: the mortgage must attach to the specific residence that you are buying, building or improving. Consider these two options:
Option 1 – Cash-out refinance of your primary home to buy a vacation home.
In this case, the mortgage is not attached to the specific residence that you are buying, building or improving. It’s attached to your primary home, not the vacation home you are buying. Therefore, the interest would not be tax deductible.
Option 2 – New mortgage on vacation home to purchase that vacation home.
In this case, the mortgage is attached to the specific residence that you are buying, building or improving. It’s attached to the vacation home you are buying. Therefore, the interest would be tax deductible assuming the other requirements are met.
This is one reason why it’s so important to consult with a qualified mortgage professional and evaluate your options before you make a decision.
Contact me for more information or if you’d like to explore your options!
PLEASE NOTE: THIS ARTICLE AND OVERVIEW IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE LEGAL, TAX, OR FINANCIAL ADVICE. PLEASE CONSULT WITH A QUALIFIED TAX ADVISOR FOR SPECIFIC ADVICE PERTAINING TO YOUR SITUATION. FOR MORE INFORMATION ON ANY OF THESE ITEMS, PLEASE REFERENCE IRS PUBLICATION 936.
Source: CMPS Institute
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