How To Turn Your Mortgage in to Tax Deductible Mortgage | Real Estate Tax Tips

[@RealEstateTaxTips]

Watch the updated version of How to Turn Your Mortgage into a Tax Deductible Machine | 2023 High-Interest Rate Edition here : kzbin.info/www/bejne/iIvVlnSXjbmqitk

[@Motiahmed330]

Hi Cherry! Please make an updated version of this video for our current higher interest rate environment. This was very well explained. Would also love to hear some downsides (mortgage vs HELOC carrying costs)

[@RealEstateTaxTips]

Sure. Sounds good!

[@Motiahmed330]

@@RealEstateTaxTips thank you and much appreciated! I watch and share your videos all the time ! So informative. Please keep doing these ..they benefit so many Canadians 🙏

[@11511mido]

Thanks for sharing this strategy.i have a question for you. Can I use the funds from heloc to pay for rental property owned by corp? How increasing interest rates affect this method?

[@bryanmilner7262]

at the end of doing this for 5 years your personal mortgage is say partially in original mortgage at 4 % and partially in heloc at 6 -7 percent . do you eventually re finance the heloc back into the lower percentage ? or are you continuing this trend until the house is paid off . what does the final look like and how does this work when one house nears being paid off. would you then refinance and take equity from rental property and re allocate that into a new investment and continue this method ?

[@dakewang0826]

Thanks Cherry, this is an interesting idea! I just have two questions after giving it some thoughts (sorry if they are dumb): 1. You mentioned using HELOC to pay various expenses incurred by the rental property, can I use the HELOC to pay the interest and principal of the mortgage of the rental property? Would that qualify tax deductible? 2. From my understanding HELOC is a second lien mortgage on top of the first lien mortgage. Although the interests on HELOC is tax deductible, it doesn’t impact the fact that the interests on the first lien is not tax-deductible nor the amount of interests owed under the first lien. I’m simply borrowing more through HELOC and the interests on the new borrowings are tax deductible. I’m not ‘turning’ non-deductible interests into tax deductible interests. In another words, I will end up borrowing more and paying more interests for various rental property expenses which I would otherwise be able to pay using rental income. Is my understanding correct?

[@RealEstateTaxTips]

1) you can definitely use the HELOC to pay for the mortgage interest and principal... interest is deductible if the fund is used for the purpose of earning investment income, then yes, you can deduct the expense. 2) Not really understanding your second question. Not an expert in the second lien arena. This strategy is really just converting the non-deductible primary home mortgage interest to deductible mortgage interest. It's about redirecting the income you are already earning. Are you going to pay more interest on your line of credit? Maybe. Over time, you can also negotiate with your bank to turn this portion of the line of credit as a mortgage, allowing you to pay less interest. Also keep in mind that most people's idea of interest is pre tax interest rate. When you get to deduct the interest against your rental income, the true after tax cost of interest is what you should use to compare with what you are paying on your non-deductible primary residence mortgage. Hope this helps.

[@brianko5720]

@@RealEstateTaxTips Regarding the first point. After using HELOC to pay rental property mortgage interest and principle. Is the interest on the rental property mortgage still tax deductible? ie. if one use $1000 Heloc with 5% interest, to pay off $1000 mortgage on rental property (lets say $300 principle and $700 interest), then total you can claim $750 as tax deductible interest?）

[@jeangray6863]

You're a true blessing to me.

[@billzhang9752]

Could you provide the consultation in Mandarine?

[@RealEstateTaxTips]

Bill, if it is after tax season, a few of my team members can speak mandarin. :) Please ask for it specifically and we can make the arrangement.

[@nicoallen6097]

Hi Cherry, thanks for the awesome video. One Question, if I didn’t have a rental property but I had another business could this method still work. And if not why?

[@cucinasenorita5089]

Hi Cherry. Great information! We just both our first rental and planning to fully furnish it for students. Would the furnishings be tax deductible too? Thank you.

[@RealEstateTaxTips]

Yes, absolutely. If they are brand new, you might have to deduct them as a capital item (meaning you have to set it up as an asset, and then depreciate them based on the CRA rates), instead of a one time write off. Good luck with your student rental.

[@vijayppatel]

Question: will it help if I use my senior citizen parent name into my first home property holder and mortgage too, to get refund on annual property tax ?

[@maxd2491]

Thanks for the video. Let’s say you have a 1.71% 5-year fixed mortgage on primary residence and HELOC rate on primary residence is 6.7%. Does it make sense to do this? Ie. take rental income, apply it to primary residence mortgage, take it back from HELOC, put in a separate account, pay rental property expenses. Highest tax bracket (53.5%). Thank you

[@RealEstateTaxTips]

I would recommend running the numbers for having the interest on your Principal Residence as a deduction on rental income to look at any potential tax savings vs additional interest paid.

[@mynamejefft]

Hi Cherry! Thanks for the video. Quick question, does it also make sense to do it between 2 investment properties instead of your primary residence?

[@RealEstateTaxTips]

Don't need to do it between two investment properties if the borrowed funds on these properties are both incurred for investment purpose.

[@billzhang9752]

use rental income to pay down the primary residence mortgage , and use the HELOC account to pay the mortgage and property tax of rental property . Will this strategy be considered as an aggressive tax strategy by CRA?

[@RealEstateTaxTips]

Not at all. :) Great question though. You can deduct interest you incur for the purpose of earning the rental income, for as long as it is earning income, not capital gain.

[@MyWorld-bu4ib]

@@RealEstateTaxTips So in my case I use HELOC to pay rental property mortgage, maintenance fees, property taxes, what about the interest on the HELOC? I used it to put a down payment on the property and that's another $250 interest. Do I draw the $250 from the HELOC to pay it down again? In other words borrow from the credit line to pay the credit line. The rental income covers all my expenses except the interest on the HELOC.

[@21jmartin]

Hi cherry, Mentioned in the video, that you wont have to spend additional money as you are only re-directing the funds as the interest expense is saved at the end of current tax season. But wouldn't you have to pay the growing monthly interest expenses until you claim the deductions during tax filing?

[@RealEstateTaxTips]

The mortgage interest (which originally was a blended mortgage payment on a monthly basis) is now transformed to the line of credit interest. You would have to pay your line of credit interest, but it is now tax deductible. The mortgage interest on your primary residence is smaller as now your balance outstanding is much smaller as well.

[@Radwinskee]

I may not understanding it right but does this only work if you have rental property?

[@RealEstateTaxTips]

This can also applies (the five step process) to business income, dividend income and interest income - assuming that they are earned in your personal name. If they are earned in the corporation's name, that's a little more complicated. if the income is earned in registered accounts (RRSPs or TFSAs) then this process doesn't apply

[@mouadbenaicha4378]

This is brilliant, thanks Cherry!

[@RealEstateTaxTips]

Hope you can save a few tax dollars.

[@deepthind5579]

Thanks Cherry, Pls clarify 1) if we are transferring $24,000 of rental income to pay towards our principal residence mortgage ; Won't it increase our personal tax bracket ? 2) Why we should not use this strategy between two investment properties ?

[@hassanpaywandi221]

So you are turning primary residence to a rental property. Will that affect the capital gains when selling the house?

[@RealEstateTaxTips]

I'm not turning primary residence to a rental property, I'm turning the non-deductible primary residence mortgage to a tax deductible mortgage.

[@jessicapril]

Thanks Cherry. Question around capital gains on a primary residence. We are looking to put our home up for sale in a few months, in the meantime we have come across a home that has peaked our interest. Is there a way to purchase this home without yet selling our primary residence and transferring sales proceeds into the home a free months later or will cra see the new purchase as an investment property? Is there An overlap period for when you can transfer funds if you buy a home Beedie selling your primary?

[@RealEstateTaxTips]

Hi Jessica, primary residence exemption is an annual designation. The formula provide the +1 rule that allows you to own two properties in the year of purchase and sale. Hope this helps.

[@isaacgamingz]

Hi, so this will work for my existing rental properties? I'll start paying down my mortgage with the rental checks and use HELOC to service my rental properties? For the HELOC's interest to be deductible, servicing an investment made before, is it still considered an investment that produces income? This is the main question that I can't find a written answer to. Thanks!

[@RealEstateTaxTips]

It's not meant for rental properties, it's meant for converting your non deductible primary residence mortgage to a deductible mortgage.

[@parth71086]

Great. Thanks. 1) So we can put any X amount like 24,000$ every year and repeat any number of times over the years and withdraw that amount from HELOC. And 2) that withdrawn amount we can use for any personal expense or just some as you shown like property tax or mortgage or any? Please suggest. Thanks

[@RealEstateTaxTips]

Hi Parth, Thanks for reaching out! For any questions or consultation, please contact our office at 416-548-4228 or email us at [e-mail]

[@Indrajith4evr]

I am a little lost. Currently I have a primary home and 2 rental properties. My accountant usually claim tax deductions for the mortgage interest of the rental properties. If I utilize your method, does this mean I can continue to claim tax deductions of the rental mortgage interest and somehow do this additional deductible?

[@RealEstateTaxTips]

Yes. The video is intended to make your primary mortgage tax deductible, creating extra tax deduction

[@TheJMasaun]

Hi @Cherry, thanks for this video. Might be a silly one - but as I keep drawing from the HELOC to pay off everything rental property related, I understand that the interest incurred on rental property mortgage is tax deductible, the interest incurred on the HELOC is tax deductible, but the interest incurred on the original mortgage payments (from personal bank) are of course still non-deductible, correct? Also, as I keep drawing from my HELOC, how and when do I pay that off?

[@RealEstateTaxTips]

Jasveen, thanks for your comment... Interest deductibility is based on direct use of fund. Interest on money borrowed to purchase your primary residence is not tax deductible. Interest on money borrowed to earn investment income/rental income/business income - they are generally tax deductible. If the mortgage you mentioned is borrowed to purchase your primary residence mortgage, it is not tax deductible. We are doing a workshop, as part of our new program, on how to implement this strategy. Feel free to email our team at admin(at)cccpa.ca to ask them about the #iPlayMyCardsRight tribe.

[@sarahs.3094]

Why would we create a scenario in which we bave to create interest on HELOC to then deduct it? The mortgage interest of our primary residence comes off from monthly mortgage payment not HELOC

[@unobono]

Hello Cherry. I am about to purchase a new property. 5% down as my primary residence but it has 2 units so I will rent the other unit. may i ask some questions? 1. I heartd that in order to access the HELOC, i need to have at least 20% equity, is there any way I can use the strategy you mentioned in this video without 20% of equity? 2.would you prepay the mortgage so that you can have access to the HELOC asap or save up the fund and buy another property? Thanks

[@RealEstateTaxTips]

In terms of accessing your HELOC, you would have to check with your bank - it really goes back to the terms and conditions. I would definitely use the saving to pay down the HELOC, and then turn around to buy another property. HOWEVER, there's a true after tax cost on interest incurred. From a cash flow perspective, even taking into account the potential tax savings, you might still have a negative cash flow situation. You can't discount the after tax negative cash flow as well. Just make sure you have enough to cover everything.

[@adamz5463]

Awesome tax saving idea. Thanks for the information

[@RealEstateTaxTips]

Glad you liked it!

[@AnneKevinJackRoland]

I have watched this too many time! 😂 I appreciated your explanation and visuals. thank you! Question: in your example is it the full 24,000$ that can be taken out of the HELOC or is it the “principal” from your mortgage payments that can be taken out from the HELOC? I understood that it is the principal... or are you doubling up on your mortgage payments in this example

[@RealEstateTaxTips]

I used annual number in my example. In reality, most of my clients are implementing this on a monthly basis. Collect rent monthly Use the gross rent of $2K to pay down your primary residence mortgage (you would still pay your regularly monthly mortgage amount on top of this $2K) Home Equity Line of credit is increased by $2K Draw out from Line of credit and deposit into a dedicated bank account for managing the rental property Use funds from dedicated bank account to pay for mortgage/property tax/everything rental property related Track Home Equity Line of Credit and you would be able to deduct the interest

[@diptimehta8882]

@@RealEstateTaxTips just to clarify cherry the monthly gross rent is paid to the Locked in mortgage part and not the loc part of the product? Because most banks you need to call to make a prepayment instead of paying online so just wondering.

[@RealEstateTaxTips]

@@diptimehta8882 the key is to pay down the non-deductible portion of the primary residence mortgage/loan. You might have to talk to your bank about their particular policy. As far as I know, I can do that with Scotiabank and CIBC. Hope this helps.

[@RealEstateTaxTips]

@@diptimehta8882 assuming the locked in part of your mortgage is your primary residence, and it is non-deductible mortgage, yes, you will be making the pre-payment. Scotiabank is whom I bank with and they allow double your payment, etc. option. I do recall I email my bankers directly.

[@diptimehta8882]

@@RealEstateTaxTips Thanks Cherry! Do you know if this can be done with rental properties that are both under corporations and personal names?

[@kevinjeanveau1017]

Amazing! I am on my second house flip and I am in need of information on tax strategies. I currently own my own construction company and I am having troubles writing off labor. Small set up with a couple (cash) employees. I would love to turn this into a career and I am looking for the steps to take with Banking/Taxes etc as I grow into Long-Term rentals and flips along the way. I would love to know more about Incorporating (Holding Company + Property Management and/or General Contracting Company System).

[@RealEstateTaxTips]

Hi Kevin, like my response in your other comment, the easiest is to connect with our team to setup a call to discuss proper structure. Tax advice is very individualized and we can talk more about it when we see you and get all the information from you to make a proper recommendation.

[@lmaostefan]

Great video! super interesting strategy. I am confused how this would work if my investments are in Canadian ETFs though... I do not have a rental property to collect income from and for which I pay expenses for. Can you quickly summarize how this work if I investing in stocks?

[@RealEstateTaxTips]

This strategy requires that you use your vehicle to earn business income or property income or employment income (provided that your employer gives you the prescribed form specifying that they require you to drive your own vehicle for employment income). If you are earning passive investment income, it is not possible to write off any vehicle expense, unless you do day trading as business.

[@billzhang9752]

Hi Cherry, Could I have an urgent consultation with you about my first rental property bought in 2020?

[@RealEstateTaxTips]

Please contact our office at 416-548-4228 and someone can arrange it for you

[@billzhang9752]

@@RealEstateTaxTips I did. Still waiting for a reply from Shobha.

[@ilou224]

Not doing all that to save $360.

[@md8473]

Great video. Just subscribed to the channel. Would this strategy still apply if you use an independent line of credit not attached to the mortgage? I generate 10k monthly income from rental properties but the line of credit attached to my primary mortgage would max out as the limit is 24k. Product is call HPP with CIBC. Thanks a lot.

[@RealEstateTaxTips]

I'm personally not familiar with HPP product. The key is to pay down the non-deductible portion of the primary residence, regardless of mortgage or line of credit.

[@21jmartin]

Isn't this strategy also known as The Smith Manouvre?

[@RealEstateTaxTips]

Yes it is. :)

[@21jmartin]

Would using your HELOC for part of a down payment for a 2nd property for rental purposes, make that cash borrowed tax deductible?

[@RealEstateTaxTips]

@@21jmartin If the borrowed money is used for investment purpose, the interest incurred would be tax deductible.

[@leakinb125]

I’m confused. Are you renting out your own primary residence? If that’s the case, it shouldn’t be defined as primary residence?

[@joed960]

and why don't I just refinance my rental ==> get more money and pay my primary residence I think that would be much easier and saves much more monthly.

[@RealEstateTaxTips]

Interest from your refinanced properties is not tax deductible if they aren't used for investment purpose

[@rdy-c4o5z]

Hello Ma'am, would like to get in touch with you. I just have my primary residence rented because my family and moved to a bigger city. I am hoping to know your contact.

[@RealEstateTaxTips]

Hello! You can get in touch with us here: realestatetaxtips.ca/contact-us/. Thanks

[@MyWorld-bu4ib]

I just obtained a readvanceable mortgage and used the LOC to put 20% down payment on a condo. I now have my primary mortgage, mortgage on the rental and the LOC. Can you please provide a scenario of how I can make this into a working tax deductible strategy as I now have 3 products to deal with. I will be collecting $2000 per month. Thank you.

[@RealEstateTaxTips]

Just wrote this a few minutes ago, hope this helps. I used annual number in my example. In reality, most of my clients are implementing this on a monthly basis. Collect rent monthly Use the gross rent of $2K to pay down your primary residence mortgage (you would still pay your regularly monthly mortgage amount on top of this $2K) Home Equity Line of credit is increased by $2K Draw out from Line of credit and deposit into a dedicated bank account for managing the rental property Use funds from dedicated bank account to pay for mortgage/property tax/everything rental property related Track Home Equity Line of Credit and you would be able to deduct the interest Hope this helps.

[@MyWorld-bu4ib]

@@RealEstateTaxTips Thanks Cherry. If I use this strategy, my LOC balance would just be increasing over time while my primary mortgage is decreasing correct? Eventually my LOC will reach maximum and would have to apply to get the limit increased. Is my understanding all this correct? The LOC interest rate is also higher than the primary mortgage, does it matter?

[@RealEstateTaxTips]

@@MyWorld-bu4ib the interest incurred on your primary mortgage was not deductible if you don't implement the strategy. You can just pay it off as is. By implementing this strategy, you're turning your primary residence into a tax deductible mortgage.

[@leolin4485]

You basically need at least two properties to make this work?

[@RealEstateTaxTips]

Hi Leo, you will need to invest to make it work this strategy work. You don't need to buy a rental property but you can apply the same strategy to dividend earning stock, private lending, owning a business in your personal name, etc. The application is limitless, but yes, you do have to invest.

[@AW-gj4ji]

Hi Cherry, I'm a little confused about how this system works. However, my understanding is the following: 1) Take a loan from your rental property to pay for your primary residence(Non deductible). 2) Take a HELOC from your primary residence to pay for your rental property(deductible). For step 2, could I also use it to pay off a portion of the mortgage loan during a renewal? If I'm completely off please let me know.

[@RealEstateTaxTips]

Yes you could.

[@OnTheSpurOfTheMoment]

But then you end up with a huge loan.

[@RealEstateTaxTips]

You would have the same amount of loan regardless.