Real Estate

Maximizing the mortgage interest deductions for the rental property

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  • Feb 16th, 2017 5:33 pm
[OP]
Jr. Member
Jun 20, 2012
144 posts
15 upvotes
Toronto, Ontario

Maximizing the mortgage interest deductions for the rental property

Background: We live in a townhouse (mortgage = $400,000) and we also have a rental condominium unit (mortgage = $200,000).

Last week, I walked into the bank because my mortgage is up for renewal next month. Bank rep asked why don't I obtain a larger mortgage or get a product with a secured line of credit at prime+0.5% for the rental property...(say $200,000 + $50,000) and then use the extra money towards paying off the primary residence. She claimed this strategy is used by many clients because the mortgage interest of a rental property is tax deductible.

I can see the benefits but is anyone doing this? Is this justifiable?
8 replies
Deal Guru
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Aug 8, 2012
10198 posts
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BC
btcoma wrote: Background: We live in a townhouse (mortgage = $400,000) and we also have a rental condominium unit (mortgage = $200,000).

Last week, I walked into the bank because my mortgage is up for renewal next month. Bank rep asked why don't I obtain a larger mortgage or get a product with a secured line of credit at prime+0.5% for the rental property...(say $200,000 + $50,000) and then use the extra money towards paying off the primary residence. She claimed this strategy is used by many clients because the mortgage interest of a rental property is tax deductible.

I can see the benefits but is anyone doing this? Is this justifiable?
Bad advice. It's too late to do this legally now.

The interest is deductible only if the funds are used to generate income (or have the possibility to do so).

The original mortgage on the rental property is tax deductible because that money was borrowed to earn rental income.

Borrowing more money now from your rental property and investing it in the stock market would make that interest tax deductible, but ...

Borrowing more money now and paying it onto your personal residence mortgage would NOT.

You should tell them they are giving bad advice.

Reference: http://www.cra-arc.gc.ca/tx/ndvdls/tpcs ... u-eng.html
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Sr. Member
Sep 7, 2009
698 posts
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I wonder how many people do this, not understanding the rules, claim the deduction and then never get audited? I'm sure lots of people are gaining just because of their lack of knowledge.
Member
Sep 22, 2014
377 posts
148 upvotes
Ottawa, ON
^^agreed. Your bank is giving you terrible advice.

The only thing you can do now would be to refinance for a longer amortization (provided there is enough equity and income) and then use the freed up cashflow towards your mortgage. But keep in mind, you may pay less monthly interest (dt longer amort) and may have to pay more income tax. In the long run, you'll pay more interest which you'll be able to write off more rental income.
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holden wrote: I wonder how many people do this, not understanding the rules, claim the deduction and then never get audited? I'm sure lots of people are gaining just because of their lack of knowledge.
Sure, lots of people get away with robbery and shoplifting too :)

Probably some people are doing it and getting away with it, and some do it and get caught and have to pay penalties, fines, interest on years of improperly filed taxes :)

The CRA doesn't care that you are ignorant of the rules and were given bad advice by a clueless bank rep that just wants more commission from you borrowing more money :)
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[OP]
Jr. Member
Jun 20, 2012
144 posts
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Toronto, Ontario
Thanks so much for the prompt responses! Well, according to the mortgage specialist, apparently "many" clients with a rental property do this. It's bad advice but I guess it's a business opportunity for the bank to get their clients to borrow more money. Hate them but can't live without them.
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btcoma wrote: Thanks so much for the prompt responses! Well, according to the mortgage specialist, apparently "many" clients with a rental property do this. It's bad advice but I guess it's a business opportunity for the bank to get their clients to borrow more money. Hate them but can't live without them.
What you can do, if you have significant amount of non-registered investments is a singleton Smith Maneuver ...
1) Sell $X investments
2) Pay down non-tax-deductible primary residence mortgage by $X
3) Use new increased equity in primary residence to borrow "new" funds $X as a HELOC or another separate mortgage
4) Invest $X again (in different instruments, or the same if you wait 30 days)

The interest on $X borrowed funds is now tax deductible.

It is always the "current use" of the funds that determines if the interest is tax deductible or not. If you later sell investments to buy a car/boat/etc, that makes a portion of the interest no longer tax deductible.
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Another thing you can do, as gerogesin mentioned, is play with amortizations.

You can keep your monthly total payments the same and without affecting your cash flow you can have more interest go towards the rental (by paying it off slower and paying the primary mortgage faster).

e.g. If they both have 20-yr remaining, lengthen the rental to 25-yr and shorten the primary residence to 15-yr (not precise math, just illustrative example).

There is a legal fee cost to this though ... and refinances are also at worse rates in general post-new mortgage rules introduced last fall due to insurability issues.
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Jan 15, 2017
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btcoma wrote: Thanks so much for the prompt responses! Well, according to the mortgage specialist, apparently "many" clients with a rental property do this. It's bad advice but I guess it's a business opportunity for the bank to get their clients to borrow more money. Hate them but can't live without them.
That's why you don't tax tax advice from the nice lady at the bank. Actually, if any mortgage type person tries to get you to take on a larger mortgage due to tax savings, ignore the advice. This person is being very unprofessional by providing you with advice and guidance that is outside their scope of practice. Gross misconduct at its finest.

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