# Rental property allowable interest deductions



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

I am hoping an accountant or CRA auditor can answer this question.

Senario: Rental property bought for $100. Downpayment was $20 and mortgage was $80. Normally, I can use the interest paid on the $80 mortgage as a tax deduction on my T1. Also, should I refinance and use the funds to renovate the rental, the interest on the new mortgage can be used as a deduction as well.

Question: If I refinance to recuperate my initial downpayment ($100 mortgage), will I still be able to deduct the interest since I am not surpassing my initial cost? Even if I am not using those funds as renovations? Or I am just inventing a rule that does not exist?


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## Charlie (May 20, 2011)

You can't deduct the interest on that additional $20 since it wasn't used to acquire or reno the place. Repaying your capital doesn't work.

....and I thought Just a Guy was being unrealistic at $100,000 a door!


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

Charlie said:


> You can't deduct the interest on that additional $20 since it wasn't used to acquire or reno the place. Repaying your capital doesn't work.
> 
> ....and I thought Just a Guy was being unrealistic at $100,000 a door!


technically the $20 was used to acquire the place.....but are you 100% certain of your answer or simply assuming?


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## marina628 (Dec 14, 2010)

I can only share my experience on refinance.I bought out a partner in a rental and used $45,000 cash to do so ,when the mortgage came up my accountant told me I could access a credit line to get my $45,000 back and write this interest off.
For renovations we have used these expenses to offset capital gains when we sold.


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

marina628 said:


> I can only share my experience on refinance.I bought out a partner in a rental and used $45,000 cash to do so ,when the mortgage came up my accountant told me I could access a credit line to get my $45,000 back and write this interest off.
> For renovations we have used these expenses to offset capital gains when we sold.


Yes, this strategy is common where you pay off your mortgage using a LOC so you basically keep refinancing your capital which in turn becomes tax deductible. My question is more oriented to a straight refi to recoup the initial DP....wondering if as long as I don't surpass the original purchase price, would CRA allow that?


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## Guban (Jul 5, 2011)

^ 
marina what did you do with the $45,000 when you refinanced? If it was sunk back into the property to maintain it or enhance it or to help run your business (advertise for tenants), then writing off the interest is ok. Otherwise, I think your accountant got it wrong. If you went on a (very) nice vacation, the rental property is just used as collateral for a loan. The general rule is that if it costs you money to make taxable income (now or in the future), then you can write it off. 

The same answer should apply to Mortgage u/w.


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## Charlie (May 20, 2011)

My understanding is that you need a direct link of the funds. (marina's experience notwithstanding). What was the use of the extra $20? 

Imagine you had fully paid off a rental property. Do you think you could refinance up the the orig purchase price, use the money for personal use and deduct the interest? 

Pretty sure on this....but never 100%. No doubt it's not always adhered to....more likely to pass muster if the sequence is pretty quick.


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## Woz (Sep 5, 2013)

It’s the current use of the borrowed money that matters not the first use, so your interest deduction would depend what you use the $20 for. Interest deductibility is covered here: 

http://www.cra-arc.gc.ca/E/pub/tp/it533/it533-e.html#P150_17106


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## marina628 (Dec 14, 2010)

Very complicated situation but basically because the original loan was only 15 months into a 5 year term and my partner was going through stuff he needed to be bought out.So the 45k was set up like a 2nd mortgage to buy him out ,we kept him on title til mortgage was due and at that time i paid the land transfer fees , mortgage was discharged ,i got a new one and he paid his taxes etc so it was like I bought the house twice .


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## marina628 (Dec 14, 2010)

I think you can only take back additional payments not original down payment.IE you pay extra 25k on the credit line this year and next year you break your leg and need it back you can do so.


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## Just a Guy (Mar 27, 2012)

I don't think you can do this directly. It would be similar to owing your rental as a primary residence then converting it to a rental. You have to go through some convoluted method to "sell" it back to yourself to get the equity out. It's one of those cra lack of common sense rules. 

That's why I always buy things on the heloc first and keep the 100% financing established from the beginning.


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## marina628 (Dec 14, 2010)

When in Doubt call CRA


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## Guban (Jul 5, 2011)

Calling CRA and relying on their advice is dangerous. It depends who you get on the other end. I also believe that they have a disclaimer that they are not responsible for any errors in their verbal answers.


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

So here is another example. I buy $100, mortgage $80. A year later, I refinance and get a HELOC. I don't add to my fixed mortgage so lets say its down to $70 but since the value goes up I now have a HELOC worth $100. Within the HELOC, $70 is mortgage and $30 is available as a LOC. I start using my LOC to make payments on the $70 mortgage. The $30 LOC starts filling up as the mortgage goes down. As per a CRA auditor I once met, this method is acceptable where both mortgage and LOC within the HELOC become tax deductible. (I don't currently do this but just wanted to provide this example)

Also, if I were to purchase and finance my rental at 100% using alternate financing, the full amount would be deductible. 

Lastly, if I were to obtain an interest only mortgage and keep paying interest only, then this deduction is also allowable.

So if the above examples are all acceptable, is it not logical that I can always refinance my property back to its original purchase value and keep deducting the interest?


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## Woz (Sep 5, 2013)

I think most people would see it as the same, but that's not how the CRA sees it. In the first examples there's a direct link between borrowing money and earning income. In your last example there's no direct link.

The same thing applies for people with margin accounts. If you borrow $100 from a margin account and withdraw the funds for personal use then you can't deduct the interest even though it's secured against income producing assets.


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