# Turn owned principal residency property to rental and buy another house to be the principal property



## REinvestorOtt (Sep 10, 2020)

I own my principal residency house (no mortgage). I would like to buy another house using money from this principal residency (without selling it). Then, I would like to have the new mortgage on my old principal house so I can deduct tax by converting it to rental. Is this doable? how?


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## STech (Jun 7, 2016)

REinvestorOtt said:


> I own my principal residency house (no mortgage). I would like to buy another house using money from this principal residency (without selling it). Then, I would like to have the new mortgage on my old principal house so I can deduct tax by converting it to rental. Is this doable? how?


Yup, gets done all the time. No biggie.


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## REinvestorOtt (Sep 10, 2020)

how?


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## STech (Jun 7, 2016)

You refinance the current principal residence, and use that as the down payment for your new principal residence. But be aware of capital gains taxes, and you really should have an accountant set things up properly, at least in the begging so you have a nice trail of documents if the CRA asks any questions.


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## REinvestorOtt (Sep 10, 2020)

STech said:


> You refinance the current principal residence, and use that as the down payment for your new principal residence. But be aware of capital gains taxes, and you really should have an accountant set things up properly, at least in the begging so you have a nice trail of documents if the CRA asks any questions.


but the refinance of current principal residence will be used to buy the new principal which will not be tax deduct? correct?


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## STech (Jun 7, 2016)

The interest on your principal residence will not be tax deductible, so correct there. The interest on the now rental property is tax deductible.


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## REinvestorOtt (Sep 10, 2020)

STech said:


> The interest on your principal residence will not be tax deductible, so correct there. The interest on the now rental property is tax deductible.


Ahhh, you mean it is just not deductible during the time of changing status (time needed to move out from current to the new house before posting the old principal as for rent). right?


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## STech (Jun 7, 2016)

Yes the status change will affect tax deducitability. Tax tips has a great little write on what's known as deemed disposition. You're deemed to have sold the property, even though you didn't actually sell it. Like I said, a good accountant is definitely a good idea to set this up properly. There are a few steps involved, but it's dooable. 

Taxtips: Change in use


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## Just a Guy (Mar 27, 2012)

I per wouldn’t recommend doing it. First off it’s probably not a good business decision as it’s probably valuable. Could you Sell, it and buy multiple places? Next, do you have memories of living there? Can you handle seeing the place where you made those memories trashed? It’s much easier to treat a rental as a rental if you don’t have an emotional connection.


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## Danny (Oct 17, 2012)

I am in the process of doing this. Its important to get a professional appraisal done (with paperwork that you need to keep) on your current house that you are turning into a rental. The reason for this is that eventually when you sell it you only one to pay capital gains on the increase after you had rented it. Example... you bought the house 10 years ago for 200k gets apraissed today at 400 k, you sell the now rental in 5 years for 500k you would only be paying capital gains on 100k (500-400=100). The other 200k was when you lived in it and its capital gains free. If you do not have that professional appraisal with the dates and price you are leaving everything up to the government to figure out.


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## REinvestorOtt (Sep 10, 2020)

Danny said:


> I am in the process of doing this. Its important to get a professional appraisal done (with paperwork that you need to keep) on your current house that you are turning into a rental. The reason for this is that eventually when you sell it you only one to pay capital gains on the increase after you had rented it. Example... you bought the house 10 years ago for 200k gets apraissed today at 400 k, you sell the now rental in 5 years for 500k you would only be paying capital gains on 100k (500-400=100). The other 200k was when you lived in it and its capital gains free. If you do not have that professional appraisal with the dates and price you are leaving everything up to the government to figure out.


Thanks Danny, So you paid off all your mortgage on your current principal house? if so, how much you can get for refinance from this house to use it to buy your new house (e.g. 80%)?


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## Danny (Oct 17, 2012)

65% with the heloc I have.


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## twa2w (Mar 5, 2016)

Be aware you are NOT able to deduct the interest on either mortgage according to CRA rules. You can likely do it and may get away with it but don't get caught.

CRA rules state that it is the purpose/use of the borrowed money that determines the ability to deduct it. If you remortgage your current house to buy another principal residence it is not deductible.

If you remortgage your current house and stay in it and use the funds to buy a rental property, then the interest is deductible.


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## R. Austin (May 16, 2020)

Wouldn't you realize Capital Gains when you change the status of your current principal residence to a rental? Or does it not count because for that time period it was a principal residence and thus exempt?


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## balexis (Apr 4, 2009)

twa2w said:


> Be aware you are NOT able to deduct the interest on either mortgage according to CRA rules. You can likely do it and may get away with it but don't get caught.
> 
> CRA rules state that it is the purpose/use of the borrowed money that determines the ability to deduct it. If you remortgage your current house to buy another principal residence it is not deductible.
> 
> If you remortgage your current house and stay in it and use the funds to buy a rental property, then the interest is deductible.


This. Exactly this.
Its insane how many people think that they can borrow money against a rental property and suddenly be allowed to deduct interests regardless of how the borrowed money is used for.


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## Mortgage u/w (Feb 6, 2014)

agree with the latest posts. You could refinance your current residence up to 80% LTV or 65% if HELOC but would not be able to deduct any interest since you are purchasing an owner occupied property. Only way you would be able to deduct it is if the money was used to acquire another rental or used for investment purposes. You could always perform the Smith Manouvre but that would take years before its fully deductible.


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## Sleeponit100 (Jan 4, 2014)

balexis said:


> This. Exactly this.
> Its insane how many people think that they can borrow money against a rental property and suddenly be allowed to deduct interests regardless of how the borrowed money is used for.


I'm trying to explain this exact concept to my Royal Bank Mortgage advisor. She's giving all her clients bad advice.


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## Sleeponit100 (Jan 4, 2014)

Really what you need to do is come up with a way of borrowing money that will be used to pay down your future rental property which is currently paid for and is your current residence.
Do you have a spouse that you could sell it to in her/his name only? Or a parent that resides with you?
The spouse could get a mortgage to buy the current residence from you-and presto -- tax deductible mortgage!!
No realtor commissions involved. Just that damn property transfer tax.(which would be tax deductible against rental income).
Then the money from the sale will be used to buy your new residence.

I was in a similar situation years ago with my condo that was paid off. I was single no spouse, this was when condos were only $130,000. So I figured I would sell my condo to my father, buy it back from him with a mortgage and rent it out.
I called CRA about it and their business department said it would be fine. Just as long all the paperwork was in order.
Then I got my girlfriend pregnant and I ended up selling the place to help pay for a house.lol.
It was a good solution I thought.


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