Real Estate

Advice re: rental properties and taxes

  • Last Updated:
  • Nov 13th, 2020 3:20 pm
[OP]
Member
Dec 8, 2008
400 posts
193 upvotes

Advice re: rental properties and taxes

I need some advice regarding rental properties, rent, and maximizing tax returns. I've read about the Smith Maneuver and Cash-Out Refinance / HELOC, but trying to seek out some advice for my current situation, since it's quite unique and I couldn't find any post similar to mine.

I have 2 rental properties:
Property 1:
Rental income: $1,800/month
Value = $800k
Mortgage amount remaining: $200k
I have a HELOC on this property worth $200k, and I took out ~$80k to fund the down payment for property #2 below

Property 2:
Rental income: $2,000/month
Value = $700k
Mortgage amount remaining: $370k

I currently live in a house and pay rent ($3,000/month). The reason why I don't live in either of my rental properties are due to location and size (too far from my workplace and not big enough for my family). All of my excess income goes into paying down my HELOC as that is the highest interest rate. I've also accelerated my monthly mortgage payments on property #1...but I'm not sure if this is the right thing to do.

My questions are:
1. Should I continue accelerating my monthly payments on either of the rental properties? I don't really have any other debt other than the mortgages/HELOC payments.
2. At what point should I consider a "cash-out finance" on either of my properties, and does it make sense to use that to buy a place to live in (instead of renting as I currently am)? My property #1 has a primary mortgage and HELOC, can I do a "cash-out finance"?
3. Are there any tax considerations I'm missing or not capitalizing on?

Thank you in advance!
9 replies
Temp. Banned
Apr 29, 2010
569 posts
939 upvotes
GTA
Youre missing out on primary residence cap gains exemption.

But I think you can still qualify for it. Just move into one of your condos and live for a year before you sell it. Or the CRA gonna come and take 25% of your gains.
Deal Addict
Mar 3, 2018
2106 posts
2122 upvotes
GTA
If you borrow funds from one of your rental units to buy a primary residence the interest would not be deductible. The Smith Maneuver is about making that non deductible interest become deductible over time. The issue though is that the HELOC to make this arrangement has higher interest rates then a basic mortgage and may negate any benefit. Might be easier to sell one of your units to buy your primary residence and work on paying off any leftover personal mortgage.
Jr. Member
User avatar
Jun 3, 2019
173 posts
146 upvotes
GTA
aiz_324 wrote: I've also accelerated my monthly mortgage payments on property #1...but I'm not sure if this is the right thing to do.

My questions are:
1. Should I continue accelerating my monthly payments on either of the rental properties? I don't really have any other debt other than the mortgages/HELOC payments.
2. At what point should I consider a "cash-out finance" on either of my properties, and does it make sense to use that to buy a place to live in (instead of renting as I currently am)? My property #1 has a primary mortgage and HELOC, can I do a "cash-out finance"?
3. Are there any tax considerations I'm missing or not capitalizing on?

Thank you in advance!
1. Why would you accelerate your mortgage payments before paying off the HELOC as I assume the HELOC has the higher rate?
2. Refinance a rental property only to the point where you won't be cash flow negative, and no I would not recommend to pull money out to pay for your primary residence (it should be the other way around). Any mortgage with a HELOC, most lenders will only refinance you to the point where your mortgage and max HELOC amount is 80% LTV. You may want to roll the HELOC into your refinanced amount for the lower rate but you miss out on the flexibility of the HELOC unless you go with a re-advanceable HELOC product.
3. Best to talk to an accountant to maximize your tax savings.
Realtor® & Mortgage Agent
[OP]
Member
Dec 8, 2008
400 posts
193 upvotes
trebmember wrote: 1. Why would you accelerate your mortgage payments before paying off the HELOC as I assume the HELOC has the higher rate?
2. Refinance a rental property only to the point where you won't be cash flow negative, and no I would not recommend to pull money out to pay for your primary residence (it should be the other way around). Any mortgage with a HELOC, most lenders will only refinance you to the point where your mortgage and max HELOC amount is 80% LTV. You may want to roll the HELOC into your refinanced amount for the lower rate but you miss out on the flexibility of the HELOC unless you go with a re-advanceable HELOC product.
3. Best to talk to an accountant to maximize your tax savings.
Thanks for everyone's response!

I think my reasoning for accelerating my mortgage payment is to be "mortgage free" with property #1, so that when I eventually do look for a place to purchase as my primary place of residence, I will qualify for a higher mortgage...does that make sense?
My mortgage rate is 3.39%, and my HELOC is 2.95%... so actually my mortgage rate is actually higher at this time. Does it still make sense to pay down my mortgage vs. HELOC in this case?
Jr. Member
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Aug 14, 2020
178 posts
165 upvotes
Hamilton, ON
aiz_324 wrote: Thanks for everyone's response!

I think my reasoning for accelerating my mortgage payment is to be "mortgage free" with property #1, so that when I eventually do look for a place to purchase as my primary place of residence, I will qualify for a higher mortgage...does that make sense?
My mortgage rate is 3.39%, and my HELOC is 2.95%... so actually my mortgage rate is actually higher at this time. Does it still make sense to pay down my mortgage vs. HELOC in this case?
First of all, trebmember is right on all of his points, especially consulting an accountant. The principles people are talking about here are valid, it is just a matter of prioritizing tax and interest savings but also considering buying a house to save on rent. It does make sense in terms of Debt Service Ratios to pay down debt in that regard. Tax is important, but you can't let the tax tail wag the real estate dog. Eventually, it will likely make more sense to pay down your own mortgage once you have one and have more of your debt on the rentals where it is tax deductible. But what I think I'm hearing is that you want to own your own residence, and you have enough equity to do it if you have the income plus rent to cover the debt service. It's worth a look.
_



Getting a mortgage is like writing a test...except you're allowed to work with someone who knows the answers!

Kirby Reschny
Mortgage Agent
Real Mortgage Associates (FSRA #10464)
Jr. Member
User avatar
Jun 3, 2019
173 posts
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GTA
aiz_324 wrote: Thanks for everyone's response!

I think my reasoning for accelerating my mortgage payment is to be "mortgage free" with property #1, so that when I eventually do look for a place to purchase as my primary place of residence, I will qualify for a higher mortgage...does that make sense?
My mortgage rate is 3.39%, and my HELOC is 2.95%... so actually my mortgage rate is actually higher at this time. Does it still make sense to pay down my mortgage vs. HELOC in this case?
In that case it makes sense to pay down the mortgage first and make interest only payments to the HELOC for now. If you can qualify for a principle residence without having to be mortgage free in either rental property, I'm not so sure it makes sense to payoff the mortgage on the rental units. I would pull out as much equity from the rentals as comfortably as your finances dictates. Consider it tax free money to use for other investments, just don't use the money to buy a home to live in. A good accountant can show you how to arrange your finances to get around that problem.
Realtor® & Mortgage Agent
Newbie
Mar 15, 2012
59 posts
16 upvotes
TORONTO
Since you used the heloc to purchase a rental property ie to invest you can deduct this interest expense against your rental income
Newbie
Jan 27, 2013
54 posts
28 upvotes
Montreal
lolbeast wrote: Youre missing out on primary residence cap gains exemption.

But I think you can still qualify for it. Just move into one of your condos and live for a year before you sell it. Or the CRA gonna come and take 25% of your gains.
Im not sure that is correct. You will be taxed on all the capital gain during the period it was a rental. You cant rent out a property for 20yrs and then just come and live one year before selling it to have all the capital gain tax free. Only the capital gain during the period where it was your primary residense is tax free.
Temp. Banned
Apr 29, 2010
569 posts
939 upvotes
GTA
darwm13 wrote: Im not sure that is correct. You will be taxed on all the capital gain during the period it was a rental. You cant rent out a property for 20yrs and then just come and live one year before selling it to have all the capital gain tax free. Only the capital gain during the period where it was your primary residense is tax free.
Thanks for letting me know. So the cap gains is prorated based on time it was investment? That makes sense.

Or someone with 10 properties can "unwind" and live in one property for 1 year each before cashing it out.

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