Real Estate

Tax Question (Interest Deduction - Rental Property)

  • Last Updated:
  • Aug 11th, 2016 3:44 pm
[OP]
Sr. Member
Sep 16, 2009
683 posts
474 upvotes

Tax Question (Interest Deduction - Rental Property)

Hello Fellow RFDers. Have a Tax Question.

1. Have a Primary Property (House A) bought few years back with Current Mortgage X
2. Bought another House (House B) this year with Mortgage 2X (roughly) and rented out House A.

* House B is now the primary property and House A is a rental property.
* Interest on Mortgage X on House A is deductible against Income it generates. BUT!
* Interest on Mortgage 2X on House B is not deductible
* Any way to swap Interest on House B for Interest on House A as far as deduction goes?

Will have to ask an accountant as well I suppose, but needed an initial input.

Thanks!
8 replies
Deal Addict
Feb 21, 2004
1556 posts
351 upvotes
Montreal
Yep, you will want to ask your accountant about the Cash Damming strategy, it is a variant of the Smith Maneuver.

It is a 100% legal tax optimization strategy (confirmed by Supreme Court). It will take some time but eventually, you will be able to convert your entire non-deductible mortgage into a deductible one.

PS: Make sure you assess your House-A before you start renting it out. It will be much easier when you sell from a capital gains tax perspective.
[OP]
Sr. Member
Sep 16, 2009
683 posts
474 upvotes
Thanks. I will try to find an accountant who knows well about this. Already rented out House A and living in B. So its a bit complex I suppose.

Do you mean I will be able to convert the full mortgage on House B or House A (coz on house A its only the principal portion which can not be deducted for now). ?
Deal Addict
Jan 13, 2014
2245 posts
1211 upvotes
Calgary
The only way this is possible is to have an equity line up to 80% of home value of house A. Take out the equity and put it on against the mortgage on house B. Now you can claim the interest paid on the equity line on house A against the income. But I don't think you can fully swap the interest on house B until or unless you have significant equity in house A to pay of the house B mortgage.

So say for instance your house A is worth 200k and you have a mortgage of 100k. Your house B is worth 400k and you have a mortgage of 320k. You can take out 60k LOC (given you qualify ) on house A and out this money against the mortgage of house B making your mortgage 260k. Now claim the interest on house A LOC against rental income .
[OP]
Sr. Member
Sep 16, 2009
683 posts
474 upvotes
masarwar wrote: The only way this is possible is to have an equity line up to 80% of home value of house A. Take out the equity and put it on against the mortgage on house B. Now you can claim the interest paid on the equity line on house A against the income. But I don't think you can fully swap the interest on house B until or unless you have significant equity in house A to pay of the house B mortgage.

So say for instance your house A is worth 200k and you have a mortgage of 100k. Your house B is worth 400k and you have a mortgage of 320k. You can take out 60k LOC (given you qualify ) on house A and out this money against the mortgage of house B making your mortgage 260k. Now claim the interest on house A LOC against rental income .
No i don't think you can do that actually. The interest on LoC is deductible only when you are "investing" it I believe. If you use it to pay off a primary house mortgage, its not deductible as its not an investment and hence the Cash Damming strategy etc. Its logical, but apparently not CRA approved.
Deal Addict
Feb 21, 2004
1556 posts
351 upvotes
Montreal
What you are going to want to do is to set up a readvanceable HELOC on your principle residence (House B with mortgage 2X), e.g. for any single dollar you pay on your mortgage, you can re-borrow that dollar (up to 80% of the value of your house).

Now here's how you set this up:

1) Set up 2 distinct bank accounts, one receivable one payable
2) Deposit the rent of your rental property (House A with Mortgage X) into your personal bank account (from which Mortgage 2X on House B is drawn upon)
3) Use the HELOC that was taken out on your principal residence (House B )to pay for EVERYTHING related to your investment property (House A), this includes utilities, maintenance, insurance AND the entire mortgage monthly payment (capital + interest)

As time goes by, the mortgage on your principal residence (House B) will be completely paid off while you will have a big HELOC attached to it, on which interests are fully deductible as you used it for investment purposes (to pay for your investment property aka House A). You will have effectively converted your non-deductible mortgage into a fully deductible mortgage. This is called the Cash Damming strategy.

It is 100% legit as CRA even explicitly outlined this in an interpretation bulletin after losing a high-profile case (Google "Canada vs Singleton"). Verify with your local provincial jurisdiction but in Quebec, the provincial government abode to the same interpretation as the Feds

PS: The ultimate key here is to keep a trace of EVERYTHING that comes out of your HELOC. Every single dollar that goes out from that credit line must be traced to a deductible expense on your investment property. I would keep an Excel spreadsheet to track everything in case they come knocking
PS2: I'm not a tax lawyer nor expert but I did consult with several tax lawyers here in Montreal about this. Make sure you revise everything with your own professionals to validate if this applies for you.
Last edited by HoTiCE_ on Aug 10th, 2016 9:48 pm, edited 1 time in total.
Deal Addict
Jan 13, 2014
2245 posts
1211 upvotes
Calgary
Well this topic made me learn something new today. Something to keep in mind now! Thank you for the responses even though I am not the OP.
[OP]
Sr. Member
Sep 16, 2009
683 posts
474 upvotes
HoTiCE_ wrote: What you are going to want to do is to set up a readvanceable HELOC on your principle residence (House B with mortgage 2X), e.g. for any single dollar you pay on your mortgage, you can re-borrow that dollar (up to 80% of the value of your house).

Now here's how you set this up:

1) Set up 2 distinct bank accounts, one receivable one payable
2) Deposit the rent of your rental property (House A with Mortgage X) into your personal bank account (from which Mortgage 2X on House B is drawn upon)
3) Use the HELOC that was taken out on your principal residence (House B )to pay for EVERYTHING related to your investment property (House A), this includes utilities, maintenance, insurance AND the entire mortgage monthly payment (capital + interest)

As time goes by, the mortgage on your principal residence (House B) will be completely paid off while you will have a big HELOC attached to it, on which interests are fully deductible as you used it for investment purposes (to pay for your investment property aka House A). You will have effectively converted your non-deductible mortgage into a fully deductible mortgage. This is called the Cash Damming strategy.

It is 100% legit as CRA even explicitly outlined this in an interpretation bulletin after losing a high-profile case (Google "Canada vs Singleton"). Verify with your local provincial jurisdiction but in Quebec, the provincial government abode to the same interpretation as the Feds

PS: The ultimate key here is to keep a trace of EVERYTHING that comes out of your HELOC. Every single dollar that goes out from that credit line must be traced to a deductible expense on your investment property. I would keep an Excel spreadsheet to track everything in case they come knocking
PS2: I'm not a tax lawyer nor expert but I did consult with several tax lawyers here in Montreal about this. Make sure you revise everything with your own professionals to validate if this applies for you.
Thanks. A visit to the accountant is in order. Seems like i will have little benefit to begin but a good amount of benefit as time goes on.

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