# Line of Credit



## vjparikh (Apr 26, 2009)

I own a town house which is almost paid off (only about $15,000 to be paid in balance against the mortgage). I intend to rent out this townhouse and buy a new detached home which will be my principal residence.

If I take out a line of credit against my current townhouse and use the money from the line of credit to make a down payment on the new detached home, would I be able to expense the interest I pay on the line of credit towards the rental income? 

I know interest payments on line of credit are deductible only if they are used for income earning investments. In my case I am using the line of credit to make a down payment on my new principal residence.

Please advise


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## FrugalTrader (Oct 13, 2008)

vjparikh said:


> I know interest payments on line of credit are deductible only if they are used for income earning investments. In my case I am using the line of credit to make a down payment on my new principal residence.
> 
> Please advise


I think you answered your own question. Interest paid for a principal residence is not tax deductible unless a portion of the residence is used as a business/rental.


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## alekseyz (May 1, 2009)

vjparikh said:


> I own a town house which is almost paid off (only about $15,000 to be paid in balance against the mortgage). I intend to rent out this townhouse and buy a new detached home which will be my principal residence.
> 
> If I take out a line of credit against my current townhouse and use the money from the line of credit to make a down payment on the new detached home, would I be able to expense the interest I pay on the line of credit towards the rental income?
> 
> ...


What you can do is to refinance the existing property. Pull out as much money as you can and use it as the downpayment for another property. Obviously your mortgage will increase from 15,000 to big number, however the interest payments can be deducted against your rental income


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## iherald (Apr 18, 2009)

alekseyz said:


> What you can do is to refinance the existing property. Pull out as much money as you can and use it as the downpayment for another property. Obviously your mortgage will increase from 15,000 to big number, however the interest payments can be deducted against your rental income


or take out a 15,000 mortgage on the townhouse to pay for the down payment.


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## mrcheap (Apr 4, 2009)

My understanding in this situation is that FT is right, you won't get a deduction for it however you do it. 

Ultimately you're borrowing to buy a principle residence, which isn't deductible in Canada. Once you're using the property for a rental, I believe the interest on the existing mortgage would then become deductible.

One situation where you could deduct the interest on a loan would be if you moved into the new property, then renovated the previous property in order to rent it out. That would clearly be a loan for investment purposes.

Just because a mortgage is attached to a rental property DOESN'T make it deductible! Refinancing (or a second mortgage) won't do it, unless the money you're borrowing is used for investment purposes. 

This is my understanding as a (non-accountant) layman. Your mileage may vary (as the kids say...)


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## GregR (Apr 10, 2009)

I'm not sure about your personal investments, but if you have enough non-registered investments you could sell off the investments and then borrow against the rental unit and reinvest. 

Would be the same as the smith manouver only different kind of....

Just a thought.


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## mfd (Apr 3, 2009)

GregR said:


> I'm not sure about your personal investments, but if you have enough non-registered investments you could sell off the investments and then borrow against the rental unit and reinvest.
> 
> Would be the same as the smith manouver only different kind of....
> 
> Just a thought.


that would be hit on capital gains but I guess he would have to calculate his break even point with the interest and taxes savings.


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## Spidey (May 11, 2009)

Its a bit of a round about way of doing things, but what I would do is sell the townhouse because capital gains are not taxed on a principal residence. I would then buy the house and later take a tax-deductible mortgage to buy a townhouse as an income-producing property (provided that's the type of investment you're interested in). 

The downfall, is that you would incur sales related costs on the sale and future repurchase of the townhouse. However, you would have the opportunity to settle into your new house without being burdened buy other costs and rental-related hassles (you will usually have enough on your plate after moving into a new house). You could also take your time and decide if a townhouse is the best income investment or if something else would be preferable (perhaps a different property or a combination of REITs and dividend stocks).


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## mrcheap (Apr 4, 2009)

Spidey: While I think you're right that that would be a good way to avoid the taxation, you'd have to pay the transactions fees on TWO additional real estate sales (selling the original town house, and the new one he's purchasing). I imagine that would wipe out any tax benefits (considering the real estate agent's commission alone is 5%, plus lawyer fees, plus the transfer tax [if in Toronto], etc)...


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## Spidey (May 11, 2009)

Of course, you are right Mr. Cheap. I guess my main point, which I didn't explain very well, is that it seems that the OP would be taking on too much, even if it were possible. He doesn't have his town house paid off yet and he's about to use a line of credit on the town house as a down payment for a house. So he has $15,000 remaining on his town house mortgage, a line of credit for a down payment on a house and I would assume will have another mortgage on the house. On top of all those financial obligations, he will likely have a certain amount of set up and renovation that occurs with a new house and the hassles of dealing with rentals.

In my opinion, it would be wiser to sell and leave the leveraging and rental idea on the "back burner" for a few years until the new house mortgage is well under control.


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## Vinh Eusebios (May 19, 2009)

The only way would be to do a cash withdrawal, then put the cash in your bank account.Of course, the APR on a cash withdrawal is usually INSANELY high, so make sure you're willing to throw that money away in the form of finance charges.Some cards will occasionally offer checks that you can write against your credit card balance, in which case you could probably write one to "Cash" and cash it, but those aren't that common...

Earn Extra Money


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