# Mortgage renewal question



## Murph (Sep 9, 2009)

Hi everyone, 

I have a question regarding taxes on a rental property that renews next year. I have a principal residence and investment property that both renew in June 2012, owe $44 000 on principal residence and $65 000 on investment property that currently rents for $520 monthly. Both properties are evaluated at about 150000 each. 

My question is wether I should apply for a Heloc on the investment property to pay off my principal residence in full, hence making the interest and negative cashflow of the investment property (109 000 - 520 rent) tax deductable. Is this a good idea given that I fall in a lower tax bracket due to income (under 28 k per year)? 

Any info would be much appreciated.


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## Sampson (Apr 3, 2009)

Murph said:


> My question is wether I should apply for a Heloc on the investment property to pay off my principal residence in full, hence making the interest and negative cashflow of the investment property (109 000 - 520 rent) tax deductable.


I don't believe this is allowed.

Since the borrowed money (doesn't matter where it comes from) is being used to pay for your principal residence, this is not deemed an investment and hence not deductible.


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## Four Pillars (Apr 5, 2009)

Sampson said:


> I don't believe this is allowed.
> 
> Since the borrowed money (doesn't matter where it comes from) is being used to pay for your principal residence, this is not deemed an investment and hence not deductible.


+1


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## Dana (Nov 17, 2009)

Sampson said:


> I don't believe this is allowed.
> 
> Since the borrowed money (doesn't matter where it comes from) is being used to pay for your principal residence, this is not deemed an investment and hence not deductible.


+ 1 

You could look into a cash dam though. This would ulitmately make your prinicple residence mortgage tax deductible. There is a good thread related to cash flow damming here as well as on Frugal Trader's Blog at www.milliondollarjourney.com.


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## Murph (Sep 9, 2009)

Thanks for the info everyone. 

I'm going to look into the cash damming Dana, from what I can understand the Heloc is secured against the principal residence which in turn goes towards paying the investment property. You have to sign into a fixed rate mortgage to do this right, or do some banks allow you to go variable?


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## Dana (Nov 17, 2009)

Murph said:


> Thanks for the info everyone.
> 
> I'm going to look into the cash damming Dana, from what I can understand the Heloc is secured against the principal residence which in turn goes towards paying the investment property. You have to sign into a fixed rate mortgage to do this right, or do some banks allow you to go variable?


Here's the short version: 
1. You get a HELOC secured by your prinicple residence.
2. You use the HELOC to pay all expenses related to your investment property (PIT, utilities, maintenance, etc.)
3. You use the rental income from the investment property to pay down your principle residence mortgage - regardless of whether it is variable or fixed. 
4. You end up paying off your non-tax-deductible mortgage on your principle residence and are left with a HELOC on which the interest is tax deductible.


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## Murph (Sep 9, 2009)

Thanks for the info Dana, much appreciated


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