Tax Implications Of Refinancing Your Rental Property
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- Опубликовано: 23 июл 2024
- Many investors do not know what to expect when they are refinancing their rental property.
In today's video, I’ll tell you about the two common ways of refinancing your rental property and the tax implications that come with them.I will also be addressing some of the commonly asked questions.
If you have any questions or thoughts after watching this video, leave a comment below, and I’ll respond as soon as possible.
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Tax planning is a personalized decision and will depend on your situation, priorities, and risk tolerance. Consult with your own legal and tax advisors to ensure you get the advice you personalized for you.
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Cannot thank you enough, exact topic I was looking info on. I don’t find anyone else on CDN side providing this info. God bless.
Glad it was helpful!
I am so happy i found you ! You are wealth of knowledge. Keep up the good work.
Thanks Cherry! This is an eye opener for me!
Glad you like it
Thank you for the awesome video!!
Glad you liked it!
thank you so much. great information
Glad it was helpful!
Thanks a lot Cherry!
👹Great advice, in an easy to follow along video. New subscriber! Based in Vancouver
Welcome aboard!
Thanks Cherry! Very well explained. I’d be interested in a video that goes over general strategies to maximize the interest deductibility of refinanced funds.
Great suggestion!
Thank you!
Thank you Cherry!
Glad you like it!
Very good video. Thank you!
Glad you liked it!
Great content 👍
Thank you 🙌
Thank you!!!
No problem
This is so helpful! I’m looking to build a additional dwelling unit in my backyard and was going to leverage a HELOC then refinance my mortgage at renewal. Because all the funds extracted are going to build the ADU then pay off the LOC, are all the opening cost for both the HELOC and the refinanced mortgage tax deductible? Is there a benefit to keeping the mortgage for the ADU separate?
Hi Cherry. Thank you for an excellent video. It answered many questions that I had.
One question that I still have is this:
I have a rental condo and I refinanced in May 2021 from one service provider to another. In doing so, I incurred penalty interest of $6K and fees of $1K. I am trying to determine whether this penalty and fees can be treated as interest expense and deductible from income? I researched a bit on the CRA website and found this:
"Do not deduct in full for the year any lump-sum amounts paid for interest or a fee paid to reduce the interest rate on a mortgage. You prorate these amounts for the rest of the original term of the mortgage or loan. You also prorate a penalty or bonus paid to a financial institution to pay off your mortgage loan before it is due"
From what I understand from this is that the penalty interest and fee is deductible but on a pro-rated basis. My mortgage was up for renewal in 2024 so I guess I can spread this total of $7K over three years.
Is this a correct understanding? Much appreciate your help. Thanks
Sounds like you got it right... But do make sure to check with a professional accountant that known your situation to make the proper deduction.
Hi Cherry,
Thanks for providing some details on this topic!
I have a situation I was hoping you would be so kind to shed some light on:
Situation: Refinanced a Property that half is rented out and the other half I live in. Mortgage had $350k remaining and refinanced to take out $200k. Plan is to use the money to purchase a new rental house when time is right but for now it is sitting in High Interest Saving account earning interest (interest % earned is greater than mortgage interest rate).
Option 1: Even though it is one mortgage of 550k now, I record the 200k separately and I deduct the full amount of the 200k interest against other income. This is the best option but I do not know if this would cause problem with CRA since it is all under one loan and if they would have issues with that.
Option 2: I deduct the entire new mortgage 550k interest amount against the rental property. This would mean I would only get 60% deduction. This option is simpler to report but not as good. Would this option even be allowed?
And advise on this matter would be greatly appreciated.
Thank you,
Patrick
Interest deductibility is based on direct use of funds. Since direct use of funds for $200K is to earn high interest savings, you should be able to deduct interest related to this $200K, provided that you keep all the proper documentation. Good luck!
Thank you for the video. I was looking for the information on this. We have a rental property that was our primary home for many years and we moved out and turned it to our rental. Now the mortgage renewal for rental is coming up soon in 5 months and we would like to access the equity of the place to renovate our current home. I reached out to my accountant about the tax implications and she basically said that we can refinance the rental and report rental income as usual. I don't know if it is correct though as I know the interest on rental income mortgage is tax deductible...Is this true? If not, how can I report the rental income at tax season? I don't know how the calculation would be done.....Thank you if you can respond to my inquiry...
Hi Cherry! Thanks a lot for your great video that has shed some light on some of the rental questions I have in mind.
I would like to ask a question that applies me :
I have a rental condo with mortgage interests of 500$ per month, and currently renting out at 2100$ per month. I would like to avoid paying taxes on my rental revenues. If I refinance my condo and let the remortgaged money sitting in a GIC or saving account, are the interests from my new refinanced mortgage also tax deductible ? Would I be able to evade taxes on my rental revenues that way?
Thanks a lot!
Hi there!
Thanks for reaching out. For any personalized consultation or questions, please contact my office at 416-548-4228 or email at admin@cccpa.ca. It's best to sit down and discuss these delicate matters, as each individuals situation is different and many factors need to be considered.
Thank you for the video and detailed examples! Question- are legal/bank/financing fees for refinancing a rental property to purchase another rental property an expense? CRA website suggests these are "soft costs" to be expensed over 5 years, or did I misunderstand CRA guidance? Or are these costs to be capitalized as part of the acquisition of the new rental property? If to be expensed over 5 years, which rental (old or new) property should they be expensed on?
Thanks so much.
Hi there! Thanks for reaching out! Unfortunately I won't be able to advise you without knowing more about your personalized situation. For any questions or consultation, please contact our office at 416-548-4228 or email us at admin@cccpa.ca and we will be sure to take care of you. Thanks!
Hi Cherry. Excellent information- thank you. A question: if one borrows money from one’s LOC from one’s primary residence, and invested this money on a pre-construction condo that will be done in a few years, for the purpose of eventually generating rental income once condo is done, is the interest tax deductible from the LOC while condo is being built? Thank you in advance.
Hi Febelyn, thanks for being here. Unfortunately this isn't the right platform where I would be able to advise you about your personalized situation. For any questions or consultation, please contact our office at 416-548-4228 or email us at admin@cccpa.ca and we will be sure to take care of you. Thanks!
Hi Cherry, thanks for the wonder info. Question: The rental property is up for mortgage renewal and I plan to refinance the term only, (from 20 years to 25-30 year amortization). I'm not doing any cash out refinance on the mortgage amount. Is the mortgage interest still fully tax deductible on the new 25-30 years mortgage.
if the original intent hasn't been changed, and your original intent is a qualified intent, then yes, your mortgage would still be tax deductible. :)
Best to walk through your situation with someone who knows your and our team is always happy to help as well.
This was helpful. Thanks for sharing. It has me thinking further on how to leverage my rental.
Glad you find it useful! Good luck with refinancing your property to invest further!
If I have a HELOC available from my primary residence and I use a portion for personal expense and a greater portion as a downpayment for my rental property. How will I prove that portion of fund that was used for rental property? Also when computing the interest on the fund used for investment portion, can it be done on your own ? Banks will just give you a summary of the annual statement.
In Canada, we always have to earn our tax deduction. You will have to prorate the interest based on the personal use and investment use of your line of credit, and deduct the portion that's related to the investment portion.
Bank would only be able to provide you a total.
Question: if you own 1 principal home and 2 investment properties of which you rent out one and the other, you use as a secondary residence.... can you take money out of the rented property to cover the loan of the secondary residence? What is the tax implication for such a maneuver? Thank you :) love your videos.
Thank you so much Cherry. I have a situation that hoping you can help.
I have a rental condo that refinanced and use that fund for down payment for my primary resident that I am living now. I am generating income through my primary resident by renting part of the house. My question is if I can use the interest for the money that I refinanced against income that I am generating through my primary resident?
Yes you would be able to claim only a portion of the interest as a deduction off the rental income earned from the rental income earned in your new principal residence
If for example you live in Property 1, you took out equity in say Jan 31, 2022 via refinancing. You were living in the Property 1 when you took the equity. Now in Aug 01, 2022 you rented the Property 1 and move to property 2 (you used the equity for making a down payment in Property 2 in August 2022). Given that you were living in P1 when equity was taken out so therefore you can deduct the full interest as expense towards the rental income. Is my statement correct.? Your help in this will be much appreciated.
What is the tax implication of a buyout of a rental property equally owned by two people for few years but now owned by one of them as a result of the buyout? What is the tax implication for both parties in year of buyout? How should ACB & CG be calculated when the new owner eventually sells the property?
Great 👍 I have refinanced a house I have in my holding company and collected 300 k but the condition the lender has asked is to pay 50k on my primary resident property tax outstanding.
What is the tax implication on me here ?
Since the interest charges on the mortgage to purchase a second personal use property (eg cottage) is not deductible, can you capitalize the interest charges? This would help reduce the capital gains when the cottage is sold in the future.
Unfortunately the answer is no, especially since the cottage is a personal use cottage.
However, capital improvement you have made to to cottage can be added to the cost of purchase to reduce your future capital gain.
Thank you for your video. I have a question. In case someone refinances investment property few times so that his outstanding mortgage has increased from 200000 to 500000 (just like your example in the video). If one decides to sell his primary residence and move in that investment property for more than one year before eventually selling it off, he is not liable for any capital gain taxes (on the money he obtained by refinancing earlier). Is that correct? Thanks In advance.
I have a rental property that is fully paid as in your example and a primary property with a big mortgage on it. Get mortgage on the fully paid rental property. Use that money to lump sum pay part of primary property mortgage. Then borrow money from primary property heloc to pay rental property mortgage. The interest on primary heloc money used for rental property will be tax deductible? Similar to your interest tax deduction for rental expenses described earlier. Looks legal?
Hi, Thanks for reaching out!
For any questions or consultation, please contact our office at 416-548-4228 or email us at admin@cccpa.ca
Hey Cherry I have a question regarding Question 2 Example in 12:03, correct me if I am wrong but you can only refinance a property that hasn't been paid off yet. I was told if a property is fully paid out and no mortgage outstanding then it is simply a loan when you use it to borrow money again? How did the person refinance a fully mtg paid out home?
You can finance a home when it is fully paid off. I guess people have very specific meaning to refinance. When a house is fully paid off, and you want to put a mortgage on it, I call it refinance, but ultimately it is simply putting a mortgage or a line of credit with your property as security.
Hi Cherry, if I am only refinancing to take out equity that was originally put into the property will that still be taxable?
Our circumstance is we have 600k equity in our primary (owned 7 years). We have bought a new home and are moving in a month. We will be turning our old primary into a rental and having it appraised at its current market value to avoid current capital gains in the future.
When our 1st home is up for renewal in 2 years we want to take the 600kish equity and move it to our new primary. Will this still incur a tax?
Like I mentioned in the video, and assuming that you own everything in your personal name, chances are, the amount you get from refinancing from your first home would not be taxable. However, the interest on this new loan is also not tax deductible.
(1) What if you use the refinanced money to buy a primary residence and then airbnb it? I assume since it's primary residence, then the interest is not tax deductible.
(2) Then I assume if you use the refinanced money to buy another property (not primary residence) and then airbnb it, that makes deducting the interest expense okay.
(3) Also if someone uses the refinanced money to do a fix and flip, since it's an investment I also assume that's okay then?
would it be best not to do a corproation then if you have a joint venture partner? if the exist strategy was paying them back in that equity over a 5 yr period for eg,?
everyone's situation is different and it is hard to generalize a statement. People incorporate for many different reasons, liability protection, lower tax rate for certain real estate investment strategies, flexibilities to split income with their future self...
@@RealEstateTaxTips how do you know or learn what strategy is best? It's confusing.. is that a paid consultation question?
Hi Cherry, if you use $240k to pay your loans and remaining balance of you primarily Residence mortgage. How much non tax deductible you have to buy from 240k in Ontario? 50% of the amount in tax? 240k×50%?
Thanks for the info.
I'm a bit confused by your question. Interest incurred on borrowed money to earn income is tax deductible. Interest expense incurred to paydown your primary residence is generally not tax deductible unless you initially take on the mortgage on your primary residence for investment purpose only. Not sure if this helps.
Is it OK with CRA if I purchase a rental property under spouse's name with refinanced fund?
You may be exposed to attribution rule, meaning that the income can be attributed back to you if your spouse did not contribute to the purchase of initial rental property.
Great explanation, thank you! However, I can't seem to do the math but how did the refinancing money come up to 240K?
80% of 300k that was appreciation from 500k to 800k is 240k
Exactly what Russul Peter said...
Hi Cherry, If I refinance my 1st home, and use the proceeds to buy 2nd home, and then I move to 2nd home and rent out the 1st entire home. Can i deduct the refinancing mortgage interest expense against the rental income of my 1st home?
Interest is only deductible based on direct use of funds. If you refinance, and take the funds to purchase your primary residence (personal use), chances are, you can't deduct the interest.
Hi Cherry, I might’ve missed it. But I believe you didn’t mention for a personal owned rental properties you may use the refinance capital for investment like TSFA/RRSP.
Does that mean if it’s personal owned, the type of investment is limited to another rental property?
Generally speaking, not advice, interest on money borrowed to invest in registered accounts in both TFSA/RRSP are not tax deductible.
Taxpayers can use the funds to purchase another rental property, invest in stocks OUTSIDE of registered funds and generate interest income, invest in business, etc. Generally speaking, these type of investments would allow the interest incurred on the additional loan as deductible.
Hope it helps.
@@RealEstateTaxTips thank you!
I also have a follow up question. What if I used 80% of the money borrowed for a rental property and 20% on something else? Does that mean only 80% of it is tax deductible or none at all?
@@RealEstateTaxTips Would a GIC in non registered account would qualify for interest deduction
@@TajinderSingh-ht4sr yep - anything that will generate income
@@RealEstateTaxTips Thanks Cherry.
1. Do the investment has to happen the next day you received money on refinancing or it could happen anytime in same financial year for us to claim entire interest for the whole time since refinancing.
2. Do it matter which bank ac we got funds on refinancing and which account we use for non reg investments - is that acceptable or CRA would only like to see trail of money we received from equity.
Do you provide CPA services ?any contact information?
Please reach out to us on our website realestatetaxtips.ca/contact-us/ Thanks
Canadian tax system is a JOKE, tbh everything in this country is a JOKE.
can you please explain how you got $240,000 ? what is the formula? I did not understand the 80% loan to value calculation from 500k to 800K. can you please explain
80% of 300k that was appreciation from 500k to 800k is 240k
I’m fucked