re-finance and mortgage interest

[23994]

Hi,

Recently working on my 2015 Tax and read through CRA T4036 Rental Income, saw this statement and confused:

e.g, ask "if I have rental property and re-financed it, then I put the money to my personal property as down payment, can I deduct the mortgage interest to my rental property?"

answer: No, because the money used to personal property

My question is: if I used this towards to rental property, then I can deduct the mortgage interest, but not personal property, is it correct?

But remember I was told after re-finance from rental property, I can use this money to anything e.g. renovation, downpay etc and I can always deduct the mortgage interest...I am confused now!

Please share your understanding and most important how you did in the same situation...

Appreciated!

Sue

 

[Thomas Beyer]

Any interest on money borrowed to buy a rental property can be deducted

 

[RE123RE]

Any interest on money borrowed to buy a rental property can be deducted

Hi,
Sue is actually raising an interesting point. Thomas, please note: when you take out money through refinance, say 100K, you do not borrow that additional money in order to buy a rental property (you already bought the property, this is just a re-fi).
Therefore, why do you think you can now deduct a higher interest when the additional money say 100K is used for say travelling to Japan, or buying a jet? In other words, as a result of the re-fi there is a higher principal and with that comes higher interest. Is all of it tax deductible?
Maybe the answer is Yes, as it is very difficult for CRA to investigate that further (where exactly each re-fi take out goes) and it is more efficient for CRA to just (agree to) assume all mortgage interests 'attached' to rental properties (like the mortgage in our example above) are deductible, and CRA rarely expects to distinguish between different portions of the rental property mortgage.
Not 100% sure though.
Thoughts?
Thanks

 

[Thomas Beyer]

Any money borrowed for acquisition cost plus upgrades is tax deductible.

Example: you buy a house for $400,000 with 300,000 mortgage, 100,000 down. In five years asset is worth $450,000 and mortgage paid down to $260,000. You increase mortgage from 260,000 to 350,000 by 90,000. Since you are now refinancing out your equity the loan is deductible. It is legal to finance 100% of your asset and deduct interest thereon.

 

[RE123RE]

Any money borrowed for acquisition cost plus upgrades is tax deductible.
It is legal to finance 100% of your asset and deduct interest thereon.

Hi,
Good point. If the bank approved 95% LTV for example from the start, the entire mortgage interest would obviously be tax deductible.
Hence, taking it (the loan) 'in pieces' - lower initial LTV, and later increasing through re-fi, but still (new principal) being below 100%, should be, and is, deductible in its entirety too. Makes sense.
Off to buying the jet from the example
Thanks

 

[Thomas Beyer]

Lease the jet to deduct it ... assuming it is used for business purposes.

 

[23994]

Thanks for all the discussion here, always very helpful!

let me assume 3 different scenarios and need your answer:

A - my personal property
B - my rental property with HPLC
C - my future rental property

scenario #1
withdraw money from A and put it into B via re-finance, is the mortgage interest deductible?

scenario # 2
withdraw money from B to A via re-finance, is the mortgage interest deductible?

scenario # 3
withdraw money from B to C to pay down pay, reno etc via re-finance, is the mortgage interest deductible?

Thanks!

Sue

 

[Thomas Beyer]

As stated above if you refi the initial equity "out" i.e. increase loan amount to below purchase price plus capital upgrades all interest is deductible.

As such in all three scenarios it is 100% deductible subject to the loans not exceeding property purchase price plus capital upgrades, i.e. $100,000 in the example I used above

 

[RE123RE]

As such in all three scenarios it is 100% deductible

Hi,
Including scenario A - her primary residence mortgage interest?
Thanks

 

[Thomas Beyer]

Hi,
Including scenario A - her primary residence mortgage interest?
Thanks

It depends what "into B" means, i.e. if the loan increase on personal property is less than the equity in rental property B, then yes that piece (or loan increase) is deducible, although it is best here to separate the home piece from the investment piece via a STEP mortgage (from ScotiaBank) or LOC tranche available from some banks. Not the entire piece is deductible, only the portion allocated to the investment property.

 

[RE123RE]

It depends what "into B" means, i.e. if the loan increase on personal property is less than the equity in rental property B, then yes that piece (or loan increase) is deducible, although it is best here to separate the home piece from the investment piece via a STEP mortgage (from ScotiBank) or LOC tranche available from some banks. Not the entire piece is deductible, only the portion allocated to the investment property.

Hi,
I think by "into B", Sue means that only the amount taken out through re-fi goes into B. Therefore, if I understand correctly, the balance of the primary residence principal (=new residence principal minus amount taken out) - the interest on this portion of the mortgage is still Not deductible.
Thanks

 

[23994]

Thanks both Thomas and RE123RE...let me make it more clear:

Assume I take out 50,000, will the 50,000 mortgage interest will be deductible or not? for the above 3 scenarios? seems there is No difference based on Thomas's answer

 

[Thomas Beyer]

Assuming 50,000 does not exceed the initial equity of the rental/investment property, then yes.

The issue with a loan against a personal residence is that you need to file for the rental property separately and have to show proof of a loan and that is ideally done with a tiered LOC where you can show what portion is private use and what portion is investment use !

 

[23994]

thanks Thomas and as you suggested it is better to separate the personal and investment...

Also, just want to double confirm your tips in the above: when we set up mortgage, we need 20% down, as time goes, when we re-fi, we can get almost 100% asset value as mortgage, correct?

 

[Thomas Beyer]

As a general accounting guideline: You can (and should) deduct what is actual and reasonable.

It is utterly reasonable to borrow 100% of your purchase price (plus any subsequent upgrades) if you so chose, and thus, deduct the interest thereon !

 

[RE123RE]

when we re-fi, we can get almost 100% asset value as mortgage, correct?

Hi,
Yes, just reminding it is not going to be 100% of current asset value as the banks normally do not allow that .
It's 100% of purchase price, or higher, thanks to value appreciation since.
Thanks