Do you have clients thinking about buying their new home with cash? If so, I just wanted to make you aware that the IRS gives you a 90 day window to put a mortgage on your property and gain the tax benefits associated with the coveted “acquisition indebtedness” status.

What is “Acquisition Indebtedness”?

According to the IRSA Publication 936: Any mortgage that is used to buy, build, or substantially improve a qualified home (your main or second home) qualifies for “acquisition indebtedness” status. If the amount of your mortgage is more than the cost of the home plus the cost of improvements, only the debt that is no more than the cost of the home plus improvements can qualify as acquisition indebtedness. Any additional debt may qualify as home equity debt instead.

Home Acquisition Debt Limit

The total amount you can treat as home acquisition debt at any time on your primary home and second home combined cannot exceed $1 million ($500,000 if married filing separately). Debt over the $1 million limit may qualify as home equity debt.

Refinanced Home Acquisition Debt

Any secured debt you use to refinance home acquisition debt is treated as home acquisi-tion debt. However, the new debt will qualify as home acquisition debt only up to the amount of the balance of the balance of the old mortgage principal before refinancing. Any additional new debt not used to buy, build, or substantially improve a quali-fied home is not home acquisition debt, but may qualified as home equity debt.

Acquiring an Interest in a Home because of a divorce

If you incur debt to acquire the interest of a spouse or former spouse in a qualified home be-cause of a divorce or legal separation, you can treat the new debt as home acquisition debt.

Home Equity Debt

If you took out a loan for reasons other than to buy, build or substantially improve your home, it may qualify as home equity debt. In addition, debt you incurred to buy, build or improve your home, to the extent is exceed the home acquisition debt limit, may qualify as home equity debt.

Home Equity Debt Limit

There is also a limit on the amount of debt that can be treated as home equity debt. The total home equity debt on your main home and second home is limited to the smaller of:

  • $100,000 ($50,000 if married filing separately), or
  • The total of each home’s fair market value reduced by the amount of its home acquisition debt.


The alternative minimum tax (AMT) is another concern for individuals and the mortgage interest deduction. Generally, interest paid on debt used for acquisition indebtedness on a qualified home is unaffected by individuals subject to the AMT. However, any mortgage interest paid on a qualified mortgage that was NOT used to buy, build or substantially improve a qualified home can not be included in your mortgage interest deduction.

When you have divorcing clients who plan to buy a new home with cash it is important to review tax deduction limitations. Additionally, when a client buys a new home with cash and they later decide to take a mortgage out on the property after 90 days from purchase, although a portion of the new mortgage may qualify for the mortgage interest deduction, the new mortgage will be considered a cash out refinance for mortgage purposes and may result in a higher interest rate as well as limits on loan to value, etc.

Please don’t hesitate to reach to me if I can help clarify the 90 Day Cash rule with your divorcing clients.


from the Divorce Lending Association LLC