Key Takeaways
- Paying cash for a home and borrowing against it afterward can work, but one rule decides the tax result. For homeowners and business owners weighing this plan in 2026, that rule is interest tracing. It decides how much of the loan’s interest you can deduct: all of it, some of it, or none.
- The loan’s label and its collateral don’t settle the question. So what does?
- A 90-day window after closing can matter more than the interest rate. The same loan on the same house can land in a different tax category depending on the week it closes.
- Your business entity changes the route. Sole proprietorships, S corporations and C corporations each handle borrowed money differently. One of them usually needs its own setup.
- Your current mortgage may already use up the cap. Keeping your existing home can shrink the deduction on the new loan.
Paying cash for a home has real advantages. You close faster, and sellers tend to favor offers with no financing contingency. Once the keys are in hand, though, many buyers want some of that cash back. A common version of the plan goes like this: buy the house outright, then borrow against it and put the money into your business.
As a financing move, that instinct is usually sound. The tax side is where the plan tends to break down. Many owners assume the interest will be deductible. Some point to the loan’s business label, while others rely on the house securing it. Neither one settles the question. The IRS doesn’t go by what a loan is called or what backs it. Instead, it looks at where the borrowed money actually goes. That’s why one plan can produce three different answers:
- Generally deductible as business interest, if the money genuinely goes into your business.
- Deductible as mortgage interest up to the $750,000 cap, if you take your cash back within 90 days of closing.
- Generally not deductible, if you take your cash back after day 90.
Will a Bank Lend Against a Home You Just Bought in Cash?
Generally, yes. Delayed financing, a mortgage program built for cash buyers who want to pull money back out soon after closing, is widely available. Home equity lines of credit, or HELOCs, are another option. Many commercial lenders also accept a residence as collateral for a business loan. That includes banks making loans backed by the Small Business Administration (SBA).
The pricing usually favors home-secured debt. As of September 30, 2026, Bankrate’s national survey put the average HELOC rate at about 7.3%. By comparison, SBA rules cap variable rates on 7(a) loans at the prime rate plus 3 to 6.5 percentage points, depending on loan size. Unsecured business credit often costs more still. That rate gap is real, which is why this plan comes up so often.
Still, your bank and the IRS look at the same loan in different ways. Your lender cares about the collateral, because the house is what it can recover if payments stop. The IRS doesn’t care about collateral at all. For tax purposes, it cares about what you do with the money.
What Decides Whether the Interest Is Deductible?
You can borrow against your house for almost any reason, but how you spend the money decides whether the interest is deductible. The deciding rule is interest tracing, found in Treasury Regulation 1.163-8T. Tracing means the IRS follows the loan proceeds to the way you spend them and classifies the interest by that use. Money spent in your trade or business generally creates business interest. Spending on investments produces investment interest. Personal purchases, like a car or a vacation, lead to personal interest, which generally isn’t deductible.
Home loans come with one extra rule. Interest on debt secured by your home can count as qualified residence interest. That’s the mortgage interest deduction you claim as an itemized deduction on Schedule A. However, that treatment now applies only to acquisition debt, meaning debt used to buy, build or substantially improve the home that secures it. A special 90-day rule, covered below, can also count a loan taken out soon after a cash purchase. Home equity debt, which covers home-secured borrowing used for anything else, no longer produces deductible mortgage interest. The One Big Beautiful Bill Act (OBBBA) made that disallowance permanent, along with the $750,000 cap on acquisition debt.
Tracing also follows the money’s real path, so paperwork alone won’t carry the result. Say borrowed dollars pass through a business account and come right back out to cover personal costs. In that case, the interest generally follows them to that personal use. That’s why a separate account and a clear record from loan to business spending matter so much.
One Plan, Three Tax Outcomes
Put those rules together, and the cash-then-borrow plan can end up in any of three places.
| Where the borrowed money goes | How the interest is generally treated | What to watch |
|---|---|---|
| Into your business, for real business spending | Business interest, outside the $750,000 mortgage cap | Tracing has to hold up, and your entity type affects the route |
| Back to you after the purchase, borrowed within 90 days of closing | Mortgage interest on Schedule A, limited by the $750,000 cap across your homes | An existing mortgage may already use most of the cap |
| Back to you after the purchase, borrowed after day 90 | Generally not deductible | Home equity interest is disallowed unless the money improves that home |
Outcome One: The Money Goes Into Your Business
This outcome gets you both the lower home-secured rate and deductible interest. If your business genuinely needs capital and the borrowed dollars go there, the interest can generally be treated as business interest under the tracing rules. Because it was never mortgage interest, the $750,000 cap doesn’t apply. The home is just collateral, and that doesn’t change the business interest result.
Two details tend to matter here:
- Taxpayers in this position often make an election under Treasury Regulation 1.163-10T(o)(5). It treats the debt as not secured by the residence, so the tracing rules govern without interference from the mortgage rules.
- The proceeds need a clean paper trail from the loan to the business account.
With both in place, you may be able to pair the lower home-secured rate with a business interest deduction.
Business interest can still face other limits. Larger companies may run into the federal business interest limitation. Interest tied to a business you don’t actively work in can also fall under the passive activity rules. Your CPA can check both against your facts.
Outcome Two: You Borrow Within 90 Days of Closing
This outcome keeps the lower rate, but the deduction is capped. Suppose your business doesn’t really need the money, and what you want is your cash back. The IRS allows exactly that through a 90-day window. IRS Notice 88-74 sets this rule, and IRS Publication 936 summarizes it. Debt you take out within 90 days after buying your home can count as acquisition debt, up to the home’s cost. In effect, the rules treat you as if you had financed the purchase at closing. Using the window is a compliant timing choice that the rules expressly permit.
The catch is the cap. Acquisition debt shares one $750,000 limit across your main home and one second home, which is where an existing mortgage changes the math.
Say you buy a $1.2 million home in cash while still carrying a $600,000 mortgage on your current home. Within 60 days, you take out a $600,000 loan against the new house. If you keep both homes, only $150,000 of room remains under the cap. At a 7% rate on both loans, you’d pay about $42,000 of interest a year on the new one. Roughly $10,500 of that, about one quarter, would add to your deductible mortgage interest, because only $150,000 of the new debt fits under the cap. The other $31,500 would be personal interest with no deduction.
Two more factors can shift the numbers.
- First, starting in 2026, OBBBA caps the tax benefit of itemized deductions at 35 cents per dollar for top-bracket filers. Business interest in outcome one reduces your income before you itemize, so that limit doesn’t reach it.
- Second, selling your current home and paying off its mortgage would free the full cap for the new loan. Selling the old house stopped being only a lifestyle question right there.
Outcome Three: You Borrow After Day 90
This outcome keeps the lower rate and loses the deduction. The cash-back goal is the same, but the loan closes on day 91 or later. Now it’s home equity debt, and the interest is generally not deductible unless the money goes into improving that home. Zero deduction, on the same house, at the same rate.
If you’re already past day 90, outcome two is no longer available for that purchase. Outcome one still is, because tracing doesn’t depend on timing. If the proceeds genuinely fund your business, business interest treatment can still apply. Nobody at the closing table is responsible for flagging the 90-day deadline, so it’s worth putting on your own calendar before you sign.
Does the Loan Need to Be in Your Business’s Name?
For most businesses, no. What matters is how the money gets spent, not whose name is on the loan. Your business type does affect whether you can get the business interest deduction, though, and how much setup that takes.
| Your business is a | Can a loan in your own name work? | What it generally takes |
|---|---|---|
| Sole proprietorship or single-member LLC | Generally yes | You and the business are usually the same taxpayer here, so documented business use of the proceeds typically does the work |
| Partnership or S corporation | Often, with more steps | The money generally moves into the entity through a documented contribution or loan. The result depends on how the entity uses its funds, your level of participation and other facts specific to you |
| C corporation | Often not, as usually planned | A corporation is a separate taxpayer, so putting borrowed cash into one tends to produce less favorable interest treatment. Workable structures exist, but they need to be set up before the bank underwrites the loan |
With partnerships and S corporations, the money must first move into the business. You do that by lending or contributing the borrowed funds to your partnership or S corporation. From there, two factors shape the result:
- The first is how the business spends the money. Under IRS Notice 89-35, the interest generally follows that spending.
- The second is how much you work in the business. If you work in it regularly and substantially, which the IRS calls material participation, the interest is generally treated as active business interest. If you don’t, it’s generally passive, and passive deductions can usually offset only passive income.
Our piece on active versus passive partnership income explains how the IRS draws that line. Because these details matter, two owners in similar situations can end up with different results.
C corporations need a different setup. If you put borrowed money into a C corporation in exchange for stock, the IRS generally treats that as an investment. The interest then becomes investment interest, which you can deduct only up to your investment income, such as dividends or interest. Two common approaches avoid this. The corporation can take out the loan itself, with your home pledged as collateral. Or you can lend the money to your company through a properly documented shareholder loan. Either approach works best when your CPA puts it in place before the loan closes.
How Does Georgia Treat Interest on These Loans?
Georgia starts its individual tax calculation from your federal adjusted gross income (AGI). As a result, business interest that reduces your federal AGI in outcome one generally lowers your Georgia taxable income too. Georgia’s 2026 conformity law, House Bill 1199, also generally follows the federal rules for itemized deductions, including the new 35% cap on their tax benefit.
The main difference is the federal business interest limit under Internal Revenue Code (IRC) Section 163(j), which Georgia doesn’t follow. That limit mainly affects larger businesses, so most owners using this plan won’t run into it. At Georgia’s 2026 flat rate of 4.99%, each deductible dollar of interest saves about five cents of state tax. For Atlanta-area owners and other Georgia residents, that would come in on top of any federal savings. (This is according to Georgia treatment as of October 2026; the state revisits conformity each year.)
The Questions That Decide Which Outcome Applies
When an owner brings us this plan, we usually can’t recommend a structure until we have answers to four questions:
- What will the borrowed money actually pay for? This is the deciding fact. Money that genuinely funds your business can produce business interest. If it refills your own account instead, the interest is mortgage interest only when the loan closes within 90 days.
- Do you plan to sell your current home? Not for the reason a realtor asks. Your existing mortgage counts toward the same $750,000 cap, so keeping it can shrink the deduction on the new loan.
- When does the loan close relative to your purchase? The 90-day window is a fixed deadline. If the money goes into a partnership or corporation, that setup must also be in place before closing.
- How much are you borrowing against what value? Your loan-to-value ratio, the loan amount divided by the home’s value, affects the interest rate you’re offered. Under the 90-day rule, the amount also decides how much of the loan fits under the $750,000 cap.
Choosing the loan is between you and your bank. But the same dollars, borrowed in a different order or under another name, can cost thousands more a year after tax.
How Fusion CPA Can Help
At Fusion CPA, our team works through this decision with you before anything closes. That starts with personal income tax planning that compares the business interest route with the 90-day mortgage route, using your actual numbers. From there, we review your business structure and set up records showing where the loan money goes. We also check the 90-day deadline against your closing date. That way, you can compare lender quotes by what they cost after tax, not just by rate.
Fusion CPA provides tax preparation, tax planning, outsourced accounting and CFO advisory for business owners and high-achieving individuals and families. We serve clients in 40+ states from offices in Atlanta, GA; Tampa, FL; San Juan, PR; and Park City, UT.
Reviewed by Steven Sumners, CPA, MAcc, Senior Tax and Accounting Manager at Fusion CPA.
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About the author
Trevor McCandless, CPA. MTax is the founder and CEO of Fusion CPA, a tax outsourced accounting and advisor serving business owners and high achieving individuals across 40+ states from offices in Atlanta GA, Tampa FL, San Juan Puerto Rico, and Park City Utah. He works with owners on entity structure, owner compensation, and the multi-state exposure that arrives quietly with a growing firm.
