# Claim Mortgage Interest if ... .. .



## Mordekaiser (Jul 29, 2015)

Hi guys and gals,

This is my first post so bear with me and I am completely new to this whole rental property/tax stuff. I have read all up and down google for the past week and haven't come to a definitive answer to my personal situation.

I fully own my condo - purchase price $353,000 and with 4 years capital appreciation I could probably get a FMV of $400,000.

I want to buy a house in a suburb and convert this condo into a rental unit (as it should be an easy rent in the downtown of the city).

A) What is the best method of taking out equity out of my fully owned property to put as much down on my new house which will become my principal residence?

B) Can I do it so that I can write off the interest part of the mortgage on the condo? There is so much blabber out there that I'm so confused as to whether I can write off my interest on my mortgage. It seems most people own their principal residence and then take out a loan to purchase a 2nd property as a rental property. I'm doing the opposite, I have a property and want to get as much equity out of here to put down as much as possible into my new home, rent out the condo and still be able to write off all the interest on the condo loan/mortgage etc.

I appreciate all the help. If you have any other tidbits to add that would help me on my journey please don't hesitate to include it in your replies.


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## Mordekaiser (Jul 29, 2015)

*apple*

Told you I am new to this, I couldn't even find the edit button. I live in the province of Ontario.


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## Just a Guy (Mar 27, 2012)

Well, to answer your question, you can try to refinance your property first, then use the money you get from that to purchase your new house. Technically, you should should sell your "rental" and buy it back as the money borrowed from it was not used to buy it in the first place and thus does not technically count for write offs (though a good accountant may be able to justify it without the "sale" aspect).

All that being said, a $400k property probably won't make a very good investment unless your rent is approaching $4000/month. You'd be better off selling the place and using the money to buy something at a much lower price range. Not all real estate is the same. Places that make sense as a home, don't always make financial sense as a rental. Don't try to force one to be the other, you'll usually regret it. Then, you'll go around spouting how real estate is a terrible way to invest and that there is no way you can ever make money at it...

I'd also point out that ontario's tenant laws are not very favourable to landlords. You may want to read up more on what you are getting into. This is a business, where work is involved, it's not a "I turned my old place into an ATM".


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## nobleea (Oct 11, 2013)

As JAG says, it's probably not going to be a good investment. When looking at rentals you have to look at the rent vs what the place is worth now. Not what you paid for it, or how much it costs. You could easily sell it for 400K (if that's what it's worth) and put the proceeds in to a quality REIT which gives you a bit of diversity while still exposing you to real estate. After taxes you could probably take home 1800-2000$ a month going that route. Can you rent it high enough to cover all your expenses and taxes and still have 2K net at the end of each month (accounting for vacancy)? I doubt it.

If you do intend on renting it out, it's going to be a challenge to make any mortgage on it deductible. It doesn't matter what the mortgage is on, only what the mortgage funds were used for. In this case you would be using them to buy a new house, thus not deductible. The only thing I can think of is to set up a HELOC on the condo and use it to pay ALL your rental related expenses. Interest on that would be deductible and you get to keep a lot more of the rent (minus taxes).


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## Mordekaiser (Jul 29, 2015)

Thanks for the replies.

As for rent, I would probably get a going rate of $2,200/month. From what I understood refinancing would give me up to 80% of the FMV or around $336,000.

Using a mortgage calculator that comes out to a monthly mortgage payment of $1555/month. 

So my costs would outweigh my rent, after including my taxes ($325/month) and condo fees ($406/month), that would cost me approximately $2,300/month ($100 loss). 

I don't mind this slight loss, as I am only 35 and as the condo market in my city will most likely grow in capital appreciation faster than what I can get from any reit, using historical averages, as it's not Toronto (boom and bust market but a unique city know for its stability from government jobs - I'm sure everyone can guess the city by now).

I have neighbours who have lived in a one bedroom, somehow pulled out the equity to get a bigger two bedroom, now somehow have been able to keep both and purchase a house (and they say they are writing off their interest on the mortgage - we are best friends so our conversations are very frank and honest).

A) How are they able to do so while it seems that I cannot write off my mortgage interest?

B) Can someone explain in more detail what a HELOC is relating to my personal situation.

C) Who is the best professional to talk to an accountant or a tax lawyer?


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## cashinstinct (Apr 4, 2009)

A) You can writeoff anything you want, does not mean CRA will agree if you get audited


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## Just a Guy (Mar 27, 2012)

Well, you are missing a whole bunch of expenses as well...maintenance, repairs, vacancy, etc. 

A heloc is a home equity line of credit. Basically a loan against your house, similar to a mortgage, but as you pay it down, credit becomes available.

Best person to talk to is an accountant that understands rental properties. 

You seem determined to go ahead, despite warnings from experienced people. With the numbers you are quoting, you're going to be underwater by a lot more than $100/month.


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## Spudd (Oct 11, 2011)

The housing market is also at a huge high right now, and people say condos will be hit harder than houses when it crashes. So I wouldn't count on continued appreciation. Renting it out at a loss because you expect appreciation seems like a very foolish thing to do.


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## Davis (Nov 11, 2014)

Keep in mind that if a tenant moves out, as they tend to, you may lose a month's rent if you cannot get someone in right away, e.g., if you have to paint or do repairs, which you will have to do a lot more often that you'd think. Tenants can be pretty rough on a place, and if you don't keep it in good shape, you will get worse tenants.

I agree with cashinstinct: the people who have pulled equity out of a principle residence may be breaking the law, and may get caught.


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## Mordekaiser (Jul 29, 2015)

Ok, thanks guys for the tips! I am going to talk to an accountant next week and have a mortgage broker willing to sit down and explain to me some of the financial options I have too. 

Does it make sense to just keep the condo fully paid, get the rent (minus condo fees, taxes and other related rental expenses) added to my income. pay the tax on that added income and just buy another home. With over $400,000 in equity I'm sure the bank will finance me for a decent mortgage for a $450 - $600 mortgage. 

I'll just use the after tax "rent income" from my renter to pay down my principal residence. Does that sound like a better/safer plan?


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## Just a Guy (Mar 27, 2012)

From an investment point of view? Not really. The rate of return is low, the amount of work is high and all of the benefits of having a rental (interest write off, leverage, using OPM to have people pay off the asset, etc.) are being avoided.

In case I, and everyone else, are being too subtle, this is NOT a good investment. You'd be better off selling it, pay down your home, get a heloc on your house and buying investments with the money (either a proper (read as much cheaper) place for a rental, or other forms of investments).


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## jaybee (Nov 28, 2014)

+ 1


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## tenoclock (Jan 23, 2015)

You can write off the mortgage interest on the rental condo against the rental income, along with other costs such as property taxes, insurance, condo fees, utilities, maintenance, accounting fees, and any expense related to you collecting your rent (might include automobile and travel as well). 

When you move out of the condo as your principal residence and rent it, there is a deemed disposition and acquisition at the fair market value on the day you change principal residence. Make sure you get an appraisal on the value of the condo because that will be your cost basis if you decide to sell it down the line and make a capital gain.

BTW, if you don't mortgage your rental condo, you can't exactly claim the mortgage interest on your suburban house which will be your principal residence, you will lose that deduction. If you are looking to deduct mortgage interest, better make the rental condo have the mortgage and house paid off.


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## tenoclock (Jan 23, 2015)

However, as previous posters said, CRA could challenge the position that your borrowed funds are used to pay mortgage on your house, and not to earn rental income. This is a stupid rule upheld by courts, because the economic reality isn't any different than if it were that you had originally had mortgage on your house.


Please consult an accountant and proper mortgage broker to create a paper trail which would consolidate your position as opposed to CRA's


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## andrewf (Mar 1, 2010)

Look up the concept 'cash flow damming' or 'cash damming'. It's essentially what you are talking about, except you use the full rental payment to accelerate payment of the primary residence mortgage while paying all rental related expenses (interest on the LOC, taxes, utilities, condo fees, insurance) out of a LOC or similar. The LOC is then an investment loan and the interest on it can be deducted from income. The LOC can also be refinanced as a mortgage (for lower interest rate) and still be deductible from income.

I do agree with the other advice you have received. A cash flow negative condo in a buoyant housing market (even if it is Ottawa) is a crappy investment when one considers all the alternatives.


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