Real Estate

Transfer mortgage from new house to rental property?

  • Last Updated:
  • Sep 18th, 2021 8:53 pm
[OP]
Newbie
Feb 1, 2010
54 posts
ON

Transfer mortgage from new house to rental property?

We bought a new house closing in a year and our current house is paid off. We plan to turn our current house into a rental property after we move in to the new house. However, new house is a lot more expensive and we are basically borrow as much as we can. Now from tax efficiency perspective, my understanding is basically the interest we pay on the new house won't be tax deductible, at the same time, the current house we don't pay any interest and any rental income we would need to pay full tax on it. So I am wondering what is the most financial efficient way to do it.

I'v heard that you can "transfer" our mortgage from the new house to our current house. I am not sure how it is done. Was it best to basically take a "Heloc" from the current house and use it for downpayment of the new house so I can borrow less? if so, does the interest I pay for the Heloc can be used to reduce my income from rental for tax purpose? And also my understanding is I usually have to take a higher rate for "Heloc" than a regular mortgage from the new house as a primary residence? Was it actually more efficient financially if I sell my current house and buy a new (smaller) town house specifically for rental purpose?

I understand I should talk to a mortgage speciallist or broker for that, but they usually have their own interest and just trying get the deal done through them , so I would like to understand as much as I can myself before talking to any of them in detail.
5 replies
Sr. Member
Sep 29, 2013
543 posts
330 upvotes
rebelxt2010 wrote: Was it best to basically take a "Heloc" from the current house and use it for downpayment of the new house so I can borrow less? if so, does the interest I pay for the Heloc can be used to reduce my income from rental for tax purpose? And also my understanding is I usually have to take a higher rate for "Heloc".
This is the way to do it. Borrow 80% from your current home and slap it on the new home. You can then turn that 80% revolving heloc into a a fixed term mortgage at a decent rate. I do this all the time to fund 20% downpayments on investment properties and recently got 1.3% 5yr variable with TD.
Deal Addict
Mar 3, 2018
2239 posts
2278 upvotes
GTA
Interest deductibility is based on what the use of the funds were - investment or personal. The property used as collateral to get the loan or mortgage does not matter. For example if you borrowed on your rental property and used the funds towards your new personal house the interest is not deductible. But if you borrowed on your new personal house and invested in the rental it would be deductible.

There is a way to make the non deductible interest become deductible over time that may work in your case called the 'Smith Maneuver'. There is a long thread on this already.

smith-manoeuvre-150279/
[OP]
Newbie
Feb 1, 2010
54 posts
ON
Thanks. So it basically does not make sense to use Heloc from current house to pay down the new house unless I use it for investment or sth. like that instead. It would be cheaper just to borrow from my new house (primary residence) as the rate is likely lower. If I am using Smith manoeuvre, should I use it just on the new primary residence or both?

Eitherway, so it looks like none of the method can be used as a cost to deduct the tax from rental income since I cannot proof any of the borrowed money is used for the rental property as I already paid off? It feels so unfair you are penalized from tax perspective just because you paid off the house. Does it mean I would better off selling my current house and buying a new rental property with minimum downpay from tax perspective if the tranction cost is not considered?
DaveTheDude wrote: Interest deductibility is based on what the use of the funds were - investment or personal. The property used as collateral to get the loan or mortgage does not matter. For example if you borrowed on your rental property and used the funds towards your new personal house the interest is not deductible. But if you borrowed on your new personal house and invested in the rental it would be deductible.

There is a way to make the non deductible interest become deductible over time that may work in your case called the 'Smith Maneuver'. There is a long thread on this already.

smith-manoeuvre-150279/
Last edited by rebelxt2010 on Sep 12th, 2021 8:40 pm, edited 1 time in total.
Deal Addict
Mar 3, 2018
2239 posts
2278 upvotes
GTA
rebelxt2010 wrote: Thanks. So it basically only make sense to use Heloc from current house to pay down the new house unless I use it for investment or sth. like that instead. It would be cheaper just to borrow from my new house (primary residence) as the rate is likely lower. If I am using Smith manoeuvre, should I use it just on the new primary residence or both?

Eitherway, so it looks like none of the method can be used as a cost to deduct the tax from rental income since I cannot proof any of the borrowed money is used for the rental property as I already paid off? It feels so unfair you are penalized from tax perspective just because you paid off the house. Does it mean I would better off selling my current house and buying a new rental property with minimum downpay from tax perspective if the tranction cost is not considered?
As you can see from the over 200 pages in the Smith Manoeuvre thread there is a lot to consider. But getting the lowest interest rate HELOC makes sense. With that you pay off your rental property expenses and use the rental income to pay off your personal home mortgage. Over time the non deductible personal mortgage decreases faster and the deductible HELOC increases.

Selling your current house and buying another with borrowed money would work. But as you mentioned the transaction costs could be significant. Still something to consider like for example getting two rental condos instead with 20% down and the rest borrowed. Will depend on your risk tolerance though.
Sr. Member
Dec 24, 2007
803 posts
102 upvotes
GTA
This is what I understand too. Turning a mortgage paid off property into rental isn't something tax efficient. If you family has a high tax bracket it would even not worth it. Almost half of the rent goes to the government, and all risks are on you such as missing
rent etc. I would sell it and buy two other investment townhouse. .

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