# Idea on Equitizing an Income Property



## VInvestor (Feb 10, 2014)

Hi all,

I recently moved to Toronto for work and am now renting my former residence in Ottawa. I am looking to equitize the Ottawa residence so that I can use the cash as a downpayment for a new property in Toronto (whether through remortgaging, using a line of credit etc...). I currently am the co-owner of my property in Ottawa with my girlfriend.

I've been made aware that I cannot simply remortgage my Ottawa property and use the cash towards a down payment if i want the interest payments to be tax deductible, despite the fact that I initially bought the property as a primary residence and have only recently converted it to an income property. However I am thinking through the realm of the possible and was wondering if anyone knew if the following situation would allow me to remortgage my Ottawa property AND deduct the ensuing interest payments from my income:

Since my girlfriend is half owner of the Ottawa property, I was thinking that I could buy the property outright from her, making myself the only owner of the property. As such, I could remortgage the property as an income property. As I am technically buying the property from my girlfriend, I am buying an income property and can top up my mortgage, in turn making the full amount tax deductible. My girlfriend and I could then use the cash to make a downpayment on a Toronto property.

Note that we (my girlfriend and I) currently file separate taxes, so this should not prove to be an issue.

If anyone has any thoughts on if this structure works from a tax perspective, they would be greatly appreciated!


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

I may be wrong (I'm not a tax expert) but you can definitely remortgage up to a maximum of 80% loan to value and the portion that you consider is not tax deductible can converted as such by making the payments of the mortgage via a line of credit. The interest from the line of credit thus becomes 100% tax deductible.


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## Arshes76 (Jul 5, 2013)

I think the issue is when you remortgage the income property the funds borrowed would be for your Toronto property, which i assume you would be living in as your new primary residence. Which would make the mortgage interest not tax deductable, or only a portion of it would be tax deductable. You would be essentially borrowing against the income property to pay for a personal reisdence. Buying the property from your girlfriend wouldnt change that.


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## MRT (Apr 8, 2013)

My understanding similar to that of Arshes76.

AFAIK, the rule on writing off the interest from a loan/PLC/HELOC is that the funds need to be used to generate income. 

Using the equity from a property (regardless of whether or not it is a rental) to buy a primary residence in Toronto would not meet that criteria, as no income is being generated from the borrowed funds.


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## bgc_fan (Apr 5, 2009)

That's odd, I would have thought that the fact the mortgage is against an income property would make the interest tax deductible. Essentially, your loan/mortgage is used to generate income, even if you are using the cash to pay down a primary residence.


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## Just a Guy (Mar 27, 2012)

You should talk to an accountant but I think you can take out a loan on your former principal residence and buy a new principal residence, effectively "selling" it to yourself and then use the loan to "finance" the rental. It's a form of self financing which is allowed.

If you owned a house for 20 years as your principal residence, your money isn't locked into it just because you keep it and convert it to a rental. The money isn't technically being used from the rental (as the equity was built up when it was a personal residence). You should be able to finance your new place using that equity. If you sold it and bought two new places, paying off most of your personal one and heavily financing the rental, it would be the same.

Now, if it had always been a rental and was paid off, that would be different. However, if you put down a down payment, you could take that money back out as an expense and write off that amount as it was paid back. 

I've been financing properties 100% for a long time though, so I may be a bit off when it comes to equity rules???hence the talk to an accountant! but an argument can be made that you're self financing I think.


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## OptsyEagle (Nov 29, 2009)

This is actually quite simple. What did you do with the money you borrowed? Was it personal or was it investment? That is the only question that matters.

What was used for collateral and who signed the loan, etc., etc. is totally irrelevant.

In your example, the interest expense would not be tax deductible.


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## andrewf (Mar 1, 2010)

I guess the other question is whether you really need to keep the Ottawa property. The real estate market in Ottawa is not very healthy, and you can probably get better returns elsewhere. Are you planning to return?


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## bgc_fan (Apr 5, 2009)

OptsyEagle said:


> This is actually quite simple. What did you do with the money you borrowed? Was it personal or was it investment? That is the only question that matters.


Here's why I'm having a hard time understanding this train of thought. I see 2 scenarios that lead to the same result, though not conclusion:

1) Sell the original property, buy the second property, but keep 20% of the original property as a down payment to repurchase the original property. Get a mortgage for the remaining 80%, and it is now a rental. Conclusion: interest is tax deductible. 

2) Remortgage the original property for 80% of the value, and purchase the second property with the proceeds. Treat the original property as a rental. Conclusion: interest is not tax deductible.

In the two paths you've essentially done the same thing (purchased a second property, and mortgaged the first property), but we're saying that the mortgage interest is treated differently?

NVM: it looks as though FrugalTrader explained it here:
http://www.milliondollarjourney.com...dence-into-a-rental-property-the-solution.htm


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## OptsyEagle (Nov 29, 2009)

bgc_fan said:


> Here's why I'm having a hard time understanding this train of thought. I see 2 scenarios that lead to the same result, though not conclusion:
> 
> 1) Sell the original property, buy the second property, but keep 20% of the original property as a down payment to repurchase the original property. Get a mortgage for the remaining 80%, and it is now a rental. Conclusion: interest is tax deductible.
> 
> ...


You're not trying to use common sense logic in trying to understand the tax act are you. 

You are absolutely right and if he wishes to go to the trouble of doing what you outline in step one and paying all the costs associated with it, CRA will be happy to give him his tax deduction on the interest paid. Barring that, they will ask that simple question I indicated, "what was the purpose of the money borrowed, that created the interest in question ?". The CRA auditor will have complete blinders on, while he investigates the answer to that question above. That is the rule. No one at CRA cares whether it makes any sense.


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## bgc_fan (Apr 5, 2009)

OptsyEagle said:


> You're not trying to use common sense logic in trying to understand the tax act are you.


Yeah, I know, silly me.


> You are absolutely right and if he wishes to go to the trouble of doing what you outline in step one and paying all the costs associated with it, CRA will be happy to give him his tax deduction on the interest paid.


Basically, it's not really worth the trouble and expense to get the interest deduction. The topic is of interest to me because I may find myself in a similar situation in the near future, but based on this thread and further reading, I realize that it's not worth to hassle. OTOH, what happens in the situation where there is still a mortgage on the principle residence and you convert it to a rental? Would the outstanding be considered a loan for investment purposes, or not because the original mortgage was not for investment?


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## OptsyEagle (Nov 29, 2009)

In your example, the interest expense would be tax deductible for any interest paid during the time it was a rental investment property.


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## VInvestor (Feb 10, 2014)

Thanks for all the feedback everyone. I did speak to an accountant who does believe that this transaction would result in the interest being tax deductible.

Since my girlfriend would be selling the property to me, the transaction would be considered a sale and the money can be used for any purpose. This is not a remortgage but would be considered an outright sale of a property.

The transaction would involved two steps; the first being the sale of the property - my girlfriend and I would sell the property. Our existing mortgage would end just like any other sale to a third party.

The second transaction would be myself purchasing the home (putting down 20% of the appraised value) and using a mortgage for the remaining 80%. 

As my property is currently my primary residence, we would not be charged any capital gains tax on the sale. As soon as the transaction is complete, As the money was obtained through a "sale", the funds could be used for any purpose. The mortgage on the Ottawa property would thus be a new mortgage (rather than a remortgage). The property would be rented out at the onset and the interest for the new mortgage would be tax deductible.

The explanation kind of made sense to me (I felt it was grey zone). Happy to hear if anyone has any opinions that contradict that of the accountant I spoke with.


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