Coincidentally, I was just looking at this publication. I am considering using our cash to build a house and then get a mortgage after the house is built so I was interested in the deductibility.

Obviously, this may be a very important consideration for you so you should consult with a tax professional. In the meantime, though....

Look at the section on Home acquisition debt where it says it is considered home acquisition debt if:

"You buy your home within 90 days before or after the date you take out the mortgage. The home acquisition debt is limited to the home's cost, plus the cost of any substantial improvements within the limit described below in (2) or (3). (See Example 1 below.) "

The publication then gives an example to illustrate this:

"You bought your main home on June 3 for $175,000. You paid for the home with cash you got from the sale of your old home. On July 15, you took out a mortgage of $150,000 secured by your main home. You used the $150,000 to invest in stocks. You can treat the mortgage as taken out to buy your home because you bought the home within 90 days before you took out the mortgage. The entire mortgage qualifies as home acquisition debt because it was not more than the home's cost. "

thanks kats! I obviously didn't wade through far enough into that IRS publication. I think that's the right answer, and I'll send it on to my accountant for confirmation.

What happens if the house doesn't appraise? I think that would worry me.

Jane

If the house doesn't appraise then buyers generally put in more cash to make up the difference. It's a risk, but houses in my area are appraising pretty close to sale price.

Even cash sales should have an appraisal contingency... just like a financing deal. If it doers not appraise, the cash buyer has the same options as does one using financing.
Why not write up the contract as a cash offer and then "behind the scenes", get financing for the property? Even if the seller finds out, he/she should not care because the buyer is still obligated to perform under the cash contract. This way you get the added leverage of a "cash offer", but can still get a loan w/o worrying about deadlines or what type of loan it may be considered.

And for what it is worth... I have never had a buyer pay more than an appraisal came in at...

^ writing up the all cash offer and simultaneously getting financing is exactly what I'm doing (see initial post). The mortgage should only take 15-20 days to finalize, so it won't be long after close of escrow that I'll have the money back...well, 80% of it anyway.

OH!
You should have written up the offer to have given your lender enough time to close... 30 days... and you would not have had to worry about it.
Didn't your agent advise you of this?

One more thing... One should never use this tactic if one is not ok with the possibility of having to close with the cash, and then not getting the financing at the end.

I didn't want to bore everyone with all the details, but the only way to get this house will be an all cash offer. This is an off-market sale; the seller is a licensed Realtor in my Realtor's office and is in a difficult personal situation that requires her to sell fast and quietly.

The seller is already in contract with another buyer. The buyer has missed his date to remove his financing contingency. The seller is going to give the buyer Notice to Perform as soon as we have a signed backup contract. The lender has told the seller that the buyer's loan will come through by the end of this month (3 weeks) but the seller can't wait that long.

If we have a financing contingency, even a 15-day one which my mortgage broker says is possible, we won't give the seller enough incentive to sell to us. Instead, she will put her house on the MLS and have an all-cash buyer within 3 or 4 days. That's how hot the market is where I live. She seems to be willing to do this. We'd lose the sale or have to come up with a higher price due to the bidding war that's likely to occur.

Just for background on this zipcode, there have been 3 houses on the MLS in our target area of 20 square blocks in the past 2 months. We bid on the first one and lost out to a higher bidder - there were 5 bids. The 2nd one we didn't bid on - it also had 5 bids. The 3rd one we didn't bid on - it had 2 bids. All 3 houses sold at 3-8.5% over asking.

Since this house is a lower price than the one we bid on last month, we're confident that the loan won't be a problem. We were pre-approved for the higher loan, and my mortgage broker has been working through the process since then to make sure everything's in place for a fast turnaround on a new loan.

Wow, this is good creative stuff!

Actually the really creative part was getting my Realtor to take his commission on the side rather than as part of the sale. I took the total offer amount, subtracted 2.5%, and made that my offer to the seller. She nets the same amount but doesn't pay my Realtor's commission. She actually saves a bit on the county transfer tax which is paid by the seller as a percent of sales price. I pay a lower total amount (==> less cash for me to have to come up with now and lower property taxes in the future) and I pay my Realtor the 2.5% after the financing comes through. We had to get the broker's approval on all of this but that wasn't too difficult. This is the same Realtor who sold my house last month, so he knows I'm trustworthy.

The Notice to Perform was sent yesterday so the buyer has until tomorrow to remove the financing contingency.