# How to make mortgage interest tax deductible for a rental property.



## Shayne (Apr 3, 2009)

- home paid off
- wants to upgrade
- will remortgage for down payment
- wants to rent out the original home

Is there a set of transactions that will make the mortgage interest tax deductible?

Thanks for your help!


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## Berubeland (Sep 6, 2009)

I don't understand the question... 

Is it the homeowner has a paid off home they want to upgrade then rent out? 

They'll get the mortgage for the upgrades? 

Is that right?


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## Cal (Jun 17, 2009)

If I understand correctly.

You have a home #1, you want to purchase home #2. You would move into home #2, and rent out home #1.

Is that correct?


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## Jungle (Feb 17, 2010)

Your post is not clear, but when the rental income comes in, simply report it on your tax return. Then you can put several deductions in, including mortgage interest. 

If you are just renting out a room of your house, you will have to do a different calculation.

CRA has an excellent guide on their website that will tell you pretty much everything you need to know:

http://www.cra-arc.gc.ca/E/pub/tg/t4036/t4036-09e.pdf


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## MoneyGal (Apr 24, 2009)

He's asking whether the interest on the mortgage that he takes out on House No. 1 (now rented) in order to buy House No. 2 (principal residence) can be deducted, and the answer is no (in terms of the way the problem is structured).


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## Shayne (Apr 3, 2009)

MoneyGal said:


> He's asking whether the interest on the mortgage that he takes out on House No. 2 (now rented) in order to buy House No. 2 (principal residence) can be deducted, and the answer is no (in terms of the way the problem is structured).


Sorry for the confusion. The current property is free and clear and will be remortgaged to purchase a new house. The original house will be rented out after the family is in the new house. 

I think MoneyGal understood it properly. 

I wonder if their current property could be sold and the repurchased after 30 days as a rental property???


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## michelle170 (Sep 23, 2010)

Your question is about mortgage and a tax, right? Well, every time you make a mortgage payment, a portion of the payment is applied to interest, while the rest is applied to principal. The interest on the loan is tax deductible which makes the effective interest rate on the loan even better.


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## Dana (Nov 17, 2009)

I think Moneygal is right. Mortgage interest in Canada is not tax deductible. To make the interest tax deductible you need to borrow for the purpose of investing. Since the mortgage in this case would be used to purchase a principal residence the mortgage interest would not be tax deductible. 

If you are determined to keep house #1, the only way I can think of to accomplish deductible interest would be to set up a cash flow dam. There was a good thread in this forum a few months ago about cash flow damming. 

The easiest way to accomplish your goals of owning two properties and having a loan with tax deductible interest would be to sell house #1, use the proceeds for house #2, then take the equity from house #2 to purchase an investment property.


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## Shayne (Apr 3, 2009)

Dana said:


> I think Moneygal is right. Mortgage interest in Canada is not tax deductible. To make the interest tax deductible you need to borrow for the purpose of investing. Since the mortgage in this case would be used to purchase a principal residence the mortgage interest would not be tax deductible.
> 
> If you are determined to keep house #1, the only way I can think of to accomplish deductible interest would be to set up a cash flow dam. There was a good thread in this forum a few months ago about cash flow damming.
> 
> The easiest way to accomplish your goals of owning two properties and having a loan with tax deductible interest would be to sell house #1, use the proceeds for house #2, then take the equity from house #2 to purchase an investment property.


Thanks for your reply. I am familiar with cash damming as I am currently doing it. The major expense to be deducted is the mortgage interest. That is why I am trying to make this happen.


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## MoneyGal (Apr 24, 2009)

What Dana said. 

Here's the general rule: if the proceeds of the sale of an asset (a real property or an investment) are not taxable, you cannot deduct any interest paid to purchase the asset. 

This applies to TFSAs, RRSPs, real property, investments - anything you can think of, pretty much. 

It isn't so much that "mortgage interest is not tax-deductible in Canada" (because it is, if the asset produces taxable gains/taxable income) - instead, the rule is that tax deductions are only available when the purpose of the borrowed money is to purchase an asset that has the potential to produce taxable gains/income. 

No tax on sale? No tax deduction on interest on money borrowed to purchase it.


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## Shayne (Apr 3, 2009)

michelle170 said:


> Your question is about mortgage and a tax, right? Well, every time you make a mortgage payment, a portion of the payment is applied to interest, while the rest is applied to principal. The interest on the loan is tax deductible which makes the effective interest rate on the loan even better.


Unfortunately the interest in this case is not tax deductible as the funds from the mortgage are not being used to generate income. 

I am well verses in mortgages and taxes and I am trying to figure out a way to make the interest tax deductible. So far no luck. 

Any comments on selling the property and requiring it in a month??


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## MoneyGal (Apr 24, 2009)

Shayne said:


> Any comments on selling the property and requiring it in a month??


Ugh. Ugh. Ugh. BIG frictional costs. You'd need to run the numbers to figure out the break-even point.


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## MoneyGal (Apr 24, 2009)

Also - there's no requirement to wait a month (this isn't like the superficial loss rules). The requirement is simply that the borrowed funds be used to purchase an asset that has the potential to produce taxable gains/income.


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## Shayne (Apr 3, 2009)

That may be the way to go then. Costs would be a bit under 2K for a lawyer. I would simply own the property for a short period of time and sell it back to them and they would assume the mortgage. 

Thanks for your help girls and guys!!


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