Author Topic: Refinancing a rental property in Canada - Taxes?  (Read 4993 times)

mld

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Refinancing a rental property in Canada - Taxes?
« on: May 27, 2014, 08:51:37 AM »
Would anyone know if there would be any implications Tax wise to refinance a mortgage on a rental?

As we are preparing the details of how we plan to invest our money to reach FI, we are looking into this option. Please be gentle, we are fairly new at this and are just exploring the options :).

What we would want to do is refinance our rental to use the equity (while keeping 20% down on the property) to help pay down our own mortgage faster for the following reasons:
  • We are a part of the ''let's pay down our mortgage for peace of mind and then keep on investing'' group, although we do plan to save a part of our yearly savings in some indexed funds all the while trying to get our mortgage paid down in the next 3 years. So yeah, I've read the many threads on the pay down mortgage VS invest so there is no need to turn this thread in one of those :) Thx!
  • In Canada, the interest on our mortgage is not deductible however on our rental property, interests constitute an expense. Being near the highest tax bracket with our salaries, we thought that it might make more sense to transfer the debt to that property.

I've had a quick look at our Tax-filing sheet and it would seem to me like the amount of debt left on the property would need to be indicated on our provincial form (we live in the province of Québec) but I don't think I see anything on the Federal tax-filing sheets.

I am wondering in that case if they would consider a refinancing of a property as if we had sold and bought it that year and would tax us on the capital gain from when we first bought the place.

Thanks in advance for any help or suggestions provided!

totoro

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Re: Refinancing a rental property in Canada - Taxes?
« Reply #1 on: May 27, 2014, 09:42:57 AM »
If you borrow from your rental property to invest, the interest on your borrowed funds will be tax deductible.  If you borrow to pay down your mortgage or spend the funds otherwise for personal reasons, it will not.   

Depending on your ROI for the rental, it might be better to borrow against the rental equity to invest in stocks or something else.  The income from this could pay your mortgage for you later on when you are in a lower tax bracket.

The funds received on refinancing will not be taxable or subject to capital gains.  Capital gains will be assessed at point of sale or transfer.

mld

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Re: Refinancing a rental property in Canada - Taxes?
« Reply #2 on: May 28, 2014, 04:28:48 AM »
If you borrow from your rental property to invest, the interest on your borrowed funds will be tax deductible.  If you borrow to pay down your mortgage or spend the funds otherwise for personal reasons, it will not. 

Thank you for your response. It gives us another perspective on what to do with the funds available in our rental property in the future.

On the more logistics side of it, how do I report in my tax-filings where I am putting that money? Like how do I declare they are going towards investments and not towards my principal mortgage? I just don't see where that would be on the tax-filing sheets.

Concretely I would ask the bank to refinance the existing debt on the rental so my mortgage will increase. It would not be a separate debt such as an HELOC but an increase in the initial debt. Where would I separate the part of the interests that would not be deductible from the total interest expense on the property?

Sorry about my confusion, this is pretty much the nuts and bolts stuff I am confused about with regards to the whole aspect of if you borrow money to invest it is deductible but if you borrow for something else it isn't. If anyone can dumb it down for me that would be great :). Thanks!