Real Estate

Rental Cash Damming

  • Last Updated:
  • Feb 15th, 2020 2:57 pm
Tags:
[OP]
Newbie
Feb 4, 2010
24 posts
4 upvotes

Rental Cash Damming

I had a quick question regarding once your primary house mortgage has been paid off using the cash damming strategy with a rental property. If for example you have paid off your primary house mortgage using cash damming and have accumulated a balance on your HELOC that was used to pay for the rental expenses can you in turn convert that HELOC back into a primary mortgage on your personal house and claim the mortgage interest? I assumed you could since the HELOC amount was used for the rental property. The only reason I was thinking to convert the HELOC to a Mortgage was getting a lower interest rate to help pay it off quicker. Thoughts?
2 replies
Deal Addict
User avatar
Jan 2, 2012
3401 posts
1227 upvotes
Toronto
stunner416 wrote: I had a quick question regarding once your primary house mortgage has been paid off using the cash damming strategy with a rental property. If for example you have paid off your primary house mortgage using cash damming and have accumulated a balance on your HELOC that was used to pay for the rental expenses can you in turn convert that HELOC back into a primary mortgage on your personal house and claim the mortgage interest? I assumed you could since the HELOC amount was used for the rental property. The only reason I was thinking to convert the HELOC to a Mortgage was getting a lower interest rate to help pay it off quicker. Thoughts?
Yes it's fine. The loan stays the same you are just changing it from an open ended, interest only loan to a fixed term one with principal and interest payments. What is important for tax deductibility is what the funds were originally used for.

However you should ask yourself if it's the best decision to do. Keeping it as a HELOC keeps your cash flow required to service it at zero since you can capitalize the interest (i.e. use the HELOC to pay it's own interest, as long as there is sufficient HELOC availability). So your cash flow can be used for other things (like RRSP, TFSA, RESP, etc) which may otherwise not be tax-deductible if borrowing.

If you turn it into a mortgage you will be forced to pay principal and interest, and unable to re-borrow from it. I would only do this if you were looking to reduce/eliminate your leveraged tax-deductible debt.
[OP]
Newbie
Feb 4, 2010
24 posts
4 upvotes
rob444 wrote: Yes it's fine. The loan stays the same you are just changing it from an open ended, interest only loan to a fixed term one with principal and interest payments. What is important for tax deductibility is what the funds were originally used for.

However you should ask yourself if it's the best decision to do. Keeping it as a HELOC keeps your cash flow required to service it at zero since you can capitalize the interest (i.e. use the HELOC to pay it's own interest, as long as there is sufficient HELOC availability). So your cash flow can be used for other things (like RRSP, TFSA, RESP, etc) which may otherwise not be tax-deductible if borrowing.

If you turn it into a mortgage you will be forced to pay principal and interest, and unable to re-borrow from it. I would only do this if you were looking to reduce/eliminate your leveraged tax-deductible debt.
Thank you for confirming my logic. I was thinking about potentially using the HELOC for investments but would rather be mortgage free (both rental and primary house) by retirement in 20 years. My spouse and I are lucky enough to have great pensions that are indexed as well as a bridge benefit until age 65.

Top

Thread Information

There is currently 1 user viewing this thread. (0 members and 1 guest)