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My question is: Canadian-specific
QUESTION: We took out a draw on revolving mortgage to buy a property we intend to move into. We will rent out our existing home which will have an amount owing about 40% higher after the draw.
Will the interest on the new mortgage balance be deductible or will we have to pro-rate what we pay? Are strata fees deductible?
The new house will take 6 months to complete, should we take the draw now and invest in short term in order to make it deductible?
(Thanks for your time answering these.)
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david ingram replies:
At the moment, none of the interest you are paying out id deductible because the mortgage on your existing house has all been used to either buy the existing house or to build the new one.
After you have finished and moved into the new house, and rented out the old house, the interest which represents the old balance on the first house will be deductible.
In other words, if the existing mortgage is $100,000 and you are borrowing another $150,000 to build your new place, you will end up with a $250,000 mortgage on the rental house. All the interest is NOT deductible.
You can only claim a deduction for the interest on the original $100,000 because that was used to buy the first house. You cannot claim the interest on the $150,000 because that was used to buy or build your new personal residence.
It "IS" possible to make the rest deductible though. You need to separate the two parts of the mortgage into two documents. Make sure the first one is open so that you can pay it down at any time with any extra money such as the rent you will be receiving.
The loan for the new house should be a revolving line of credit (with both houses as security) which you can increase as you pay down the first mortgage.
You will end up with approximately the same amount of mortgages but the interest will be deductible.
Go to www.centa.com click on newsletters, click on 2001 and read the November 2001 newsletetr which includes many methods of making your mortgage deductible.
David Ingram of the CEN-TA REALTY Group
US / Canada / Mexico tax and working Visa Specialists
US / Canada Real Estate Specialists
108-100 Park Royal South
West Vancouver, BC, CANADA, V7T 1A2
(604) 980-0321 - Fax 913-9123 [email protected]
www.centa.com www.david-ingram.com
Disclaimer: This question has been answered without detailed information or consultation and is to be regarded only as general comment. Nothing in this message is or should be construed as advice in any particular circumstances. No contract exists between the reader and the author and any and all non-contractual duties are expressly denied. All readers should obtain formal advice from a competent and appropriately qualified legal practitioner or tax specialist in connection with personal or business affairs such as at www.centa.com. If you forward this message, this disclaimer must be included."
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