Home Buying in Washington>Question Details

Jess2, Home Buyer in Washington

about tax questions of buying a short sale home with all cash

Asked by Jess2, Washington Wed Aug 20, 2008

hi everyone! We are going to buy a short sale home and want to use all cash. Is there any tax policy differnce between all cash payment and mortgage payment? Is there any risk of this case?

I heard sth. about tax penalties. Is that true? Will we get some tax benefits from buying a home by cash?

Thank you!

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There are no tax penalties associated with the purchase of a property with all cash. What you may have heard is that sellers who short sell may have to pay taxes on the amount that is reported by the lender on a 1099. This does not concern you as the buyer.

When you buy all cash you don't get a tax benefit. There's no tax credit or other direct tax benefit as a result of buying all cash. All cash affects your overall tax situation as you will not have a mortgage interest deduction, which means that your overall taxable income is higher than if you had a mortgage and deducted the interest you paid from your taxable income. How much of a disadvantge that might be (if any) really depends on how much your mortgage interest would be if you had not purchased all cash and what your standard deduction is. The bigger the difference is between the standard deduction and what your itemized deductions would be with a mortgage interest deduction, the more an all cash purchase will have a tax implication. The benefit of making an all cash purchase is that your offer is stronger and you can close faster which may be attractive to the lender in a short sale. You'd also not have the cost of getting a loan. If you want to, you can always take out a loan later to get a mortgage interest deduction. I hope this helps answer your question.
1 vote Thank Flag Link Thu Aug 21, 2008
Ute Ferdig -…, Real Estate Pro in Newcastle, CA
MVP'08
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I think you have your info backwards. There is a tax incentive to buy a home with a loan. The interest you pay on the loan is deductible. There is no tax benefit to my knowledge for buying a home with all cash. You still pay property taxes regardless of how you pay for the property. You will still pay excise tax when you sell regardless of how you acquired the property.

I would highly recommend seeking the services of a tax consultant to verify to your satisfaction any sort of tax benefits/penalties.

And also remember, ..when buying a short sale...be mentally ready for the process to take a long....long....long time. I'm not kidding.
2 votes Thank Flag Link Thu Aug 21, 2008
First off when buying a short sale, the buyer does not get penalized for the amount they save between what they are buying it for and what they owe. The seller will be taxed on this amount if they have no ability to pay the shortgae. Next question is when buying a property with a mortgage you can deduct the mortgage interest you pay on it. When paying cash you loose this deduction. However on the flip side paying cash will get you a deal over having a mortgage contingincy. You can always refinance or finance it later after you own it to get your money back to do another deal and get your deductions. Lastly when buying a short sale make sure you know ho far along they are before putting in your bid. Is teh seller approved fionancially for the short sale, has the bpo and appraisal been done, has the bank approved the short sale amount. If so get it in writing, if not be prepared for a long process with no promises it will work. the key is stay in constatnt contact with th listing agent. Good luck with your purchase.
Web Reference: http://www.ScottSellsNH.com
1 vote Thank Flag Link Thu Aug 21, 2008
The tax penalties you heard about could be references to the 1099 income that you will realize when you close the sale. The shorted lender will consider the difference between the their total expenses during the transaction, including shortage on the loan principle as well as closing costs, to be income to you. Expect a 1099 for this amount in January.

It doesn't matter how you buy the property - cash or credit - the shorted bank will 1099 you for the difference, which means you'll owe taxes on that amount. I think this might be what you are referring to...
1 vote Thank Flag Link Thu Aug 21, 2008
If you are going to spend $100,000+ on a home, I would spend $500+ and talk to a local real estate tax attorney and/or CPA. Congratulations on your new home!
1 vote Thank Flag Link Thu Aug 21, 2008
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