Mortgage Principal Reduction Grrrrrr!

[VaughnandTwila]

I just received my mortgage statements for my rental properties and the principal was reduced by a significant amount ($20K). I will have to pay personal tax on this amount and can not buy enough RRSP`s to offset it. How do investors handle this? Although I like the low interest rates I do not like the principal reduction that comes along with it. I would rather have the amount that the principal was reduced in my pocket so that I could pay down the mortgage on my primary residence.

Thomas Beyer do you have any suggestions?

----Vaughn----

 

[invst4profit]

Pull out the equity by refinancing at end of term. Tax deductible interest.

 

[RCrein]

QUOTE (VaughnandTwila @ Feb 20 2010, 01:31 PM) I just received my mortgage statements for my rental properties and the principal was reduced by a significant amount ($20K). I will have to pay personal tax on this amount and can not buy enough RRSP`s to offset it. How do investors handle this? Although I like the low interest rates I do not like the principal reduction that comes along with it. I would rather have the amount that the principal was reduced in my pocket so that I could pay down the mortgage on my primary residence.

Thomas Beyer do you have any suggestions?

----Vaughn----

Not sure why you expect to pay taxes on principal reduction. I think an hours time discussing with an accountant would be a very good investment for you. You should get some very good news. Best wishes.

 

[bizaro86]

QUOTE (RCrein @ Feb 25 2010, 08:33 AM) Not sure why you expect to pay taxes on principal reduction. I think an hours time discussing with an accountant would be a very good investment for you. You should get some very good news. Best wishes.

I assume he`s planning to pay taxes on his rental income. Principal reduction is cash out of pocket, but not tax deductible. So with a fixed-payment, variable rate mortgage, the principal portion of the payment goes up when rates go down, leading to the same cashflow but a higher tax bill.

Of course, the extra equity buildup more than offsets this, but its not cash-in-hand.

Michael

 

[brentdavies]

Talk to your accountant. An important deduction is available to you called CCA, capital cost allowance, or depreciation.

If you do your taxes, go hire an expert. You will save money on your taxes, and it will pay the fee. I stopped doing my taxes years ago. My accountant found a way to get GST back on my car expenses, and that savings paid the accountant fee for the next 4 years.

 

[Thomas Beyer]

QUOTE (VaughnandTwila @ Feb 20 2010, 12:31 PM) I just received my mortgage statements for my rental properties and the principal was reduced by a significant amount ($20K). I will have to pay personal tax on this amount and can not buy enough RRSP`s to offset it. How do investors handle this? Although I like the low interest rates I do not like the principal reduction that comes along with it. I would rather have the amount that the principal was reduced in my pocket so that I could pay down the mortgage on my primary residence.

Thomas Beyer do you have any suggestions?

----Vaughn----
Congratulations ! You made 20K tax free (until sold) by improving your networth ! Where is the problem ?

You also usually depreciate the asset by 4% annually (excl. land) so usually you pay no taxes while you hold either, unless you are very lowly levered and rental income minus operating expenses minus interest minus 4% asset depreciation is positive. Is it ?

WHERE IS THE PROBLEM ?

 

[aiden1983]

QUOTE (ThomasBeyer @ Feb 25 2010, 11:33 AM) Congratulations ! You made 20K tax free (until sold) by improving your networth ! Where is the problem ?

You also usually depreciate the asset by 4% annually (excl. land) so usually you pay no taxes while you hold either, unless you are very lowly levered and rental income minus operating expenses minus interest minus 4% asset depreciation is positive. Is it ?

WHERE IS THE PROBLEM ?

Thomas I have a few questions for you:
Is it the interest of the entire mortgage or just the land? I believe it is just the land but how do you calculate the value of the building and land?
Also I assume the depreciation is on the building only, is this correct?

 

[Thomas Beyer]

QUOTE (aiden1983 @ Feb 25 2010, 01:32 PM) Thomas I have a few questions for you:
Is it the interest of the entire mortgage or just the land? I believe it is just the land but how do you calculate the value of the building and land?
Also I assume the depreciation is on the building only, is this correct?
Interest (but not principal) on entire mortgage is deductable and 4% on building value (excl. land)

 

[AndrewBenke]

QUOTE (VaughnandTwila @ Feb 20 2010, 02:31 PM) I just received my mortgage statements for my rental properties and the principal was reduced by a significant amount ($20K). I will have to pay personal tax on this amount and can not buy enough RRSP`s to offset it. How do investors handle this? Although I like the low interest rates I do not like the principal reduction that comes along with it. I would rather have the amount that the principal was reduced in my pocket so that I could pay down the mortgage on my primary residence.

Thomas Beyer do you have any suggestions?

----Vaughn----


Yes definately talk to someone about Capital Cost Allowance which reduces your income by depreciating the property against your income

 

[MonteDobson]

QUOTE (VaughnandTwila @ Feb 20 2010, 12:31 PM) I just received my mortgage statements for my rental properties and the principal was reduced by a significant amount ($20K). I will have to pay personal tax on this amount and can not buy enough RRSP`s to offset it. How do investors handle this? Although I like the low interest rates I do not like the principal reduction that comes along with it. I would rather have the amount that the principal was reduced in my pocket so that I could pay down the mortgage on my primary residence.
----Vaughn----
Could also find some more expenses to offset. Or talk to lender to extend terms back to original amortization (we did this with 3 of our mortgages) which reduces payments, but keeps interest expense higher.