Real estate investments: How to manage your mortgage interest deductible

How do homeowners deduct their mortgage interest? Read more and find out the pros and cons.

Deducting your mortgage interest is a Canadian legal wealth strategy that allows you to structure your mortgage so that it can be tax deductible. Similar to The Smith Maneuver, pioneered by Fraser Smith, it is a strategy where one borrows money using the equity from their home in the form of a home equity line of credit (HELOC) and uses the funds to invest in an income-producing property, making the interest payments on the HELOC tax deductible.

For investment properties, this works best by paying down the mortgage on one’s personal home using the gross income from the income-producing property (taking the gross rent, net of the mortgage payment on the income-producing property) and at the same time paying all the property-related expenses using the HELOC (property tax, utilities, insurance, repairs, etc). Over time, this will decrease one’s mortgage balance while simultaneously increasing the HELOC.

The key to making this arrangement work is having a mortgage with a re-advanceable feature that allows you to release the equity from your home (due to the mortgage being paid down at a faster rate) and at the same time increase your HELOC by the same amount. The HELOC interest rate must be comparable to your mortgage interest rate for this to be most advantageous. Many larger Canadian banking institutions provide this feature.

It goes without saying that in order to employ this strategy, one must be comfortable with debt and the assumption that property values will maintain their values and not decrease significantly over time. It also requires diligent tracking of income and expenses which can easily be done using simple accounting software programs or even Microsoft Excel.

The savings in your income tax as a result of this approach could save you a lot of money and increase your total return.

Be sure to consult your CPA and/or financial planner before approaching a bank, so that you have a clear and realistic idea of how much credit you should ask for. Some banks will offer you more credit than you really need. While it can be tempting to take, keep in mind that this credit will sit against your name, the same as a car loan or credit card debt, so it’s best to only accept credit you can reasonably afford to take on. For anyone starting on their real estate investment journey, good luck and stay safe!

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Disclaimer

The views and opinions expressed in this article are those of the author and do not necessarily reflect that of CPA Canada.

About the Author

Mike Rosenthall, CPA, CA

Mike is a volunteer with a passion for real estate investment, working in ethics and compliance.