Over the next 4 weeks I will be posting a series of easy to read and understand blogs regarding financial issues that affect us all. My intention is to give you a better understanding of some 
fundamental financial concepts and strategies in an effort to make a meaningful contribution to your long term financial well-being. Your personal financial journey is like a ship crossing a vast ocean in that the small course changes you make today will have a dramatic effect on where you end up tomorrow. By being aware of some basic concepts and applying sound, conservative strategies, we can create extraordinary wealth over the long term. 
Remember these concepts are not only applicable to you and your family but your friends and business associates as well. I invite your comments and questions and hope that together we can create a better future for you, your family and the people in your life.
Part I – Acquisition Indebtedness
Having a basic understanding or issues related to the tax consequences of real estate purchases can pay huge dividends over time. *Please consult a CPA as we do not under any circumstance give specific tax advice.
That being said there are a couple of issues related to mortgage interest deductions that many CPA’s are either not aware of or choose to ignore. We use the term acquisition indebtedness to describe the amount of mortgage money that a buyer borrows when purchasing either a primary residence or a second home. The mortgage interest deduction is limited to the interest 
paid on this original mortgage and is also limited to the first $1,000,000 of mortgage balance. The interest paid on any mortgage balance above $1,000,000 is not tax deductible nor is the interest paid on a refinance mortgage if the proceeds are used for anything other than home improvement. If someone pays cash for a property and does not obtain a mortgage within 90 days of the date of acquisition then they will not be eligible to receive a mortgage interest deduction on that property at anytime in the future. As previously mentioned the exception to this rule is if cash out refinance mortgage is obtained for home improvement. In addition a home owner can deduct the interest paid on up to $100,000 of “home equity” debt on their primary residence. Home equity debt would typically be in the form of an equity line of credit or second mortgage. Here is a link to the relevant section of the IRS code mortgage-interest-deduction-irs.pdf
Why is the mortgage interest deduction so important? Consider this….if your client were to obtain a 30 year fixed rate mortgage on a new home at current interest rates of 6.375% and is in a 
25% marginal tax bracket then they are effectively borrowing the money at 4.781%! (In this example the tax payer can deduct 25% of the interest being paid thus leaving the remaining 75%. 6.375% x .75 = 4.781%) 4.781% is not bad for a 30 year fixed rate. What is the effect on your tax liability at the end of the year? If you paid $10,000 in mortgage interest and were in a 25% marginal tax bracket then you would pay $2,500 less in taxes that year! (Please consult an accountant regarding possible Alternative Minimum Tax implications).
You, your family and associates should always take into consideration the tax ramifications of any real estate purchase. Being aware of these issues can potentially save you thousands of dollars per year.
Check back for next week’s topic: The Velocity of Money, How Fast Do You Want to Go?