# Retroactive Interest deduction on rental property



## joncnca (Jul 12, 2009)

Let's say I bought a second property (not principal residence) a few years ago, before construction with the original intention of having my parents sell their house and making it their principal residence on completion. 

A portion of the down-payment was borrowed (I'm pretty secure and have my own reasons for this, don't want this to hijack my thread, so please just take this as a fact). 

Long story short, my parents may not move in after all, and I may keep the place as a rental. 

Over the years, I have paid some interest in the loan, not a huge amount but something nonetheless. I understand that interest is not deductible on investments that only generate capital gains. But if I keep the place to generate income, will the interest become tax deductible? 

Furthermore, because I didn't claim the tax deduction in the past, is it possible to amend my previous tax returns to account for the interest paid in previous years, and against what income can the deduction be applied (employment income?)? If it can only be applied to income generated by the property, can I carry forward to claim in future years? 

I have clear records of the amounts paid in interest. Anyone familiar with these deductions? Or can direct me to me info? 

Thanks


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## stardancer (Apr 26, 2009)

If this interest is deductible, it would be under carrying charges- http://recherche-search.gc.ca/rGs/s...a&st=s&num=10&st1rt=0&gcwu-srch-submit=Search

However, I doubt that it would be deductible as a carrying charge. I suspect the back interest should be added to the adjusted cost base of the building. Later on, when you sell, this will help cut back any capital gain you realize. Once you actually start renting the place out, the interest would then become deductible against rental income, as would any mortgage interest.


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## andrewf (Mar 1, 2010)

This is probably worth running by an accountant, but it ought to be deductible. You should be able to amend your past filings. That may or may not raise red flags for CRA. My understanding is that they have been paying extra careful attention to investors in preconstruction housing.


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## domelight (Oct 12, 2012)

joncnca said:


> Let's say I bought a second property (not principal residence) a few years ago, before construction with the original intention of having my parents sell their house and making it their principal residence on completion.
> 
> A portion of the down-payment was borrowed (I'm pretty secure and have my own reasons for this, don't want this to hijack my thread, so please just take this as a fact).
> 
> ...


Nope you can't for the reason that it was not your intention to rent it out and even if you told CRA that was your intention you would be unable to demonstrate that you actively attempted to rent out the property over the last few years.

1. DO NOT report it on "Interest & carrying charges"
2. Once you are actively attempting to rent the property, then the interest can become deductible. But even then only once you have realized rent income. 

Read the link
http://www.cra-arc.gc.ca/tx/bsnss/tpcs/rntl/cptl-eng.html#Costs


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## stardancer (Apr 26, 2009)

+1:encouragement:


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## joncnca (Jul 12, 2009)

thanks for the replies, everyone. this seems interesting. will run by accountant when the time comes but i appreciate the different thoughts and hope you'll weigh in on some of these followup questions:

1. my original intention was not to rent. true. however, the building was under construction and i don't believe it would be reasonable to expect me to actively try to rent out a unit that is several years from completion. there's still some time before completion, and lets say i start to actively try to rent out the place 6-8 months before it's complete. my goal now is not to misrepresent my original intentions. rather, i'm modifying my original intention based on a change in circumstances, and making a reasonable attempt to satisfy the new criteria required of the new intentions (i.e. rental, looking for renter)

in this case, wouldn't it be reasonable for the interest to be deducted as a investment expense? it's not a carrying charge because i'm not getting rental income, but it's interest paid for the purpose (re-purpose) of generating income. granted, this may raise red flags...but is my logic not reasonable? if someone tells me "you must already know in advance that you are taking this loan to generate income in order to make the deduction" i guess that shoots me down. and i guess "someone" would be CRA... is that right?

2. assuming my first point above gets shot down, it seems that this soft cost (interest) during construction can be either a current expense or added to capital expense (increase ACB, right?). 

"Soft costs may be deductible as a current expense if:

the costs relate to the period you were constructing, renovating, or altering the building; and
the costs relate only to constructing, renovating, or altering the building."

if a builder is building it, do the costs relate only to constructing, renovating, altering the building only? does it not also include the purchase of the land? it seems that it can only be a current expense if, let's say, you already own/lease the land, and the costs only have to do with the building.

so it seems only option is the add the soft costs to the capital cost of the property, is my reasoning sound? in this case, there wouldn't be really anything to recover until disposition, at which point it will be an even less significant amount.

3. if the loan is still there when the rental operation begins, i guess then it could be a deductible expense. though i'm planning to get rid of the loan by then, so hopefully won't be an issue anyway.

"When all these conditions are met, the amount of soft costs related to the building that you can deduct is limited to the amount of rental income earned from the building."

so these soft costs can only be deducted against rental income. what about interest on a mortgage, maintenance, etc (carrying costs?). can those also only be deducted against rental income or against other forms of income too?

domelight, you sound like you've done this before


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## stardancer (Apr 26, 2009)

_what about interest on a mortgage, maintenance, etc (carrying costs?). can those also only be deducted against rental income or against other forms of income too?
_

They can only be deducted against rental income. If you have a rental loss for the year, that loss is a negative on your return which lowers your net/taxable income from other sources.


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## joncnca (Jul 12, 2009)

thanks =)


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