# Minimizing tax on rental income



## Vandam (Sep 11, 2011)

Me and my wife own a house with no mortgage on it. Currently we are completing new house that we took construction mortgage on and HELOC against old house on top of that. Now we plan to move to the new house and rent the old house out. The question is how can we minimize the taxes on rental income? Really, I have borrowed the money to build new house so I can rent the old house out. I think it is fair to claim the interest against rental income! The question if CRA will buy it? Here are 2 options I am thinking of:
1.	Do some maneuver and somehow make the HELOC so *we can claim the interest* we are paying on HELOC and deduct it from rental income.
2.	*Rent the house out to my mother* for a nominal fee (that covers property tax and insurance) and then she will rent the house out. We pay nominal tax on, let's say $1,000 and she claims the rest as income. Since she is in much lower tax bracket, her tax paid on rental income will be much lower...
3.	Is there any other way?
Thank you all!


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## Dana (Nov 17, 2009)

Unless you borrowed funds to purchase an investment property, the HELOC interest will not be tax deductible. To get around this, you could sell your old house and use a HELOC on your new home to finance the purchase of an investment property. This would be a "cleaner" transaction than keeping your old house and dealing with deemed disposition, fair market value, etc.


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## sprocket1200 (Aug 21, 2009)

nope, you can't write off the interest. you should have bought a fixer upper and then rented it, keeping your 'old' house as the live in.

buy a reasonable house and NEVER sell it...


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## andrewf (Mar 1, 2010)

The only way to get a deductible loan on your old house without selling it (at this point) is to start cash damming. Essentially, you use your rental income (gross income) to accelerate mortgage repayment on your new home. At the same time, you pay for all expenses related to the rental property (taxes, insurance, repairs, etc.) using a HELOC (secured against either property--probably the old house).

You need to decide whether you want to sell it and incur transaction costs (you can sell and immediately repurchase), or just wait for the investment loan to accumulate over years.


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## Vandam (Sep 11, 2011)

Good idea, andrewf! The only problem that the expenses are quite low, so I could save only $50 per year with this strategy ($100 2nd year and so on). Unless I could pay the utilities as part of the expenses though (and then renters just add it to the gross income). In this case I shall save twice more.
Anyone has any better ideas? Selling the house to somebody and purchase it back and pay transfer tax twice? Any limitations for that? Too bad it is on both my wife and my name... Otherwise we could just sell it to one another...


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## GeniusBoy27 (Jun 11, 2010)

You could also incorporate, if the house value is high enough.

However, you would have to figure out if the tax savings is worth the extra cost of setting up a corporation with the accounting and legal costs associated with setting up the corporation.

Then you could pay differential dividends to the lower income earner. 

In general, not worth it for 1 property alone (unless it's a large property), but worth it with multiple properties for a multitude of reasons that have been discussed earlier in CMF.


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## Troppus (Sep 16, 2011)

*Do you an available balance?*

Wondering if you had an available balance on the HELOC that you could start to use to invest with...if you keep track down to a T any money that you use the HELOC for to invest with, that interest is tax deductible. The income you earn from the investments you could then use to accelerate the "non-tax deductable" portion of the HELOC, then borrow that balance to invest with...I've worked with a mortgage broker that has helped structure one of my principle residences like this and I kept a good paper trail, claiming only the interest that was indeed used for investment.


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## Charlie (May 20, 2011)

A potentially bigger advantage to incorporation (or using an existing hold co) is that he can sell the paid off home to the corp at FMV, taking back a promissory note. The gain on sale would be sheltered from tax by his principal residence exemption.

The corp can then repay that note by refinancing the home. And as the debt (or replacement debt) was used by the corp to buy an income producing asset -- the interest is now deductible. And thus the value of the home can be stripped out to pay the non deductible debt on the new house, replacing it with deductible debt on the old.

If he's in BC, this can all be done through trust agreements to avoid property transfer tax. I think you'd have to pay it in Ontario on the change in beneficial interest. The mortgage on the rental could also be done through trust agreements if it's easier (or cheaper) to borrow as an individual.

Bit of a pain accounting and tax wise -- but it's one way to keep the old house and make the interest on the debt deductible.


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## andrewf (Mar 1, 2010)

Can holding corps get the same mortgage rates a person can?


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## Cal (Jun 17, 2009)

Of interest:

http://www.theglobeandmail.com/glob...terest-costs-arent-deductible/article2175143/


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## Young&Ambitious (Aug 11, 2010)

Great article Cal, I'm looking forward to reading the next instalment. I imagine this situation happens quite frequently.


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## Vandam (Sep 11, 2011)

How do I do "deemed disposition" and how do I determine "Fair Market Value" for CRA? Do I need to hire the appraiser ($260) or just print off the price of similar house from MLS?
Thanks everybody!


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## Charlie (May 20, 2011)

Here's the follow up to the article Cal posted:

http://www.theglobeandmail.com/glob...-deduct-interest-on-your-debt/article2183632/

he suggests selling to a friend and then buying back. I'd be a bit concerned that it could be challenged as not being a genuine transaction -- so I suppose your paperwork here would be critical...but the general message of the proceeds of the debt having to go directly for the acquisition of the income producing asset is the key point.


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