Author Topic: Should we sell our paid-off rental in Ottawa?  (Read 2248 times)

ottawan

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Should we sell our paid-off rental in Ottawa?
« on: August 09, 2015, 07:46:03 PM »
We currently own a rental in Ottawa - it was our primary residence and we were aggressively paying down the mortgage; it was paid-off 3 years ago.  2 years ago we decided to move, but thought we'd rent out our old house.  Being newbies to owning income property, I don't think we properly thought through all of the financials.
The situation is:
Income property is mortgage-free.  The rent more than covers all expenses associated with that house.  However, because we didn't sell that house (valued at ~$525K), we have a hefty mortgage on our new house (remaining mortgage is $490K).  The rent covers most of our primary residence's mortgage, but we end up paying about $14,000/year in mortgage interest on our primary residence, which is not tax-deductible (Canada).  If we sell our rental, we can pay off our primary residence, and not have to pay all that interest.

The question I have is  - is there a way to turn this around?  I consulted an accountant who said we could take a HELOC from our rental to pay down our mortgage, and then claim that interest against our rental - but then I also consulted CRA and was told no, you definitely can't do that (I had my doubts!)

I can't think of any way to increase our deductions against our rental and decrease non-deductible primary residence expenses, other than to sell the rental - and so not sure it makes sense to keep it.  The optimal situation of course would be for the rental to have the large mortgage, and our primary paid off; alas we are the reverse. 
We have excellent tenants who have been here 2 years, and will be staying 2 more years (they are on a 4 year work-term, and will definitely leave in 2 years).  Currently we figure we'll keep it and sell it once they leave, but any other suggestions?  We admittedly aren't really business-minded, and like the tenants, so would feel bad to sell now, but on the other hand, it is a business, and it's hard to justify keeping it.

Sorry if this is convoluted - if you need any more details or specifics to help figure this out, let me know.
Thanks~

Bob W

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Re: Should we sell our paid-off rental in Ottawa?
« Reply #1 on: August 09, 2015, 08:10:37 PM »
Would you buy a rental property of this cost for all cash if you didn't already own it?  I say, well sell then.  But don't pay down your mortgage.   Simply invest the proceeds.    That should cover you mortgage interest and diversify you.

fxsts12

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Re: Should we sell our paid-off rental in Ottawa?
« Reply #2 on: August 09, 2015, 08:23:27 PM »
The Heloc may not work, but there is no reason you cannot cash out refinance the rental.  Then use the proceeds to your new house.  Heloc and equity loans can have requirements, but a refinance doesn't need a reason.

lostamonkey

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Re: Should we sell our paid-off rental in Ottawa?
« Reply #3 on: August 09, 2015, 08:44:30 PM »
I believe that you are asking two questions in your post:

1. Should you sell your rental property?
We need to know how much it rents for to provide advice here.

2. Can you make your principle residence interest deductible?
Yes, you can. The CRA requires the money received from a loan to be used to earn interest, rental, or dividend income in order to be deductible. Your principle residence provides none of this type of income. You could sell your rental property, use the proceeds to pay off your principle residence mortgage, take out a new mortgage against your principle residence and use the proceeds to buy Vanguard ETFs. Your interest is now deductible. Ensure to keep a solid paper trail in case the CRA asks you for supporting documents.
« Last Edit: August 09, 2015, 08:46:11 PM by lostamonkey »

ottawan

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Re: Should we sell our paid-off rental in Ottawa?
« Reply #4 on: August 09, 2015, 09:21:51 PM »
I believe that you are asking two questions in your post:

1. Should you sell your rental property?
We need to know how much it rents for to provide advice here.

-Rent is $3250/mth.  Monthly costs we pay are ~ property tax $520; utilities $550; insurance $100; and then occasional maintenance costs but those are minimal as house is only 7 yrs old.

Because of owning the rental, we also have the primary residence mortgage cost that would disappear if we sold, of $2500/mth, of which >$1000 is interest. 

2. Can you make your principle residence interest deductible?
Yes, you can. The CRA requires the money received from a loan to be used to earn interest, rental, or dividend income in order to be deductible. Your principle residence provides none of this type of income. You could sell your rental property, use the proceeds to pay off your principle residence mortgage, take out a new mortgage against your principle residence and use the proceeds to buy Vanguard ETFs. Your interest is now deductible. Ensure to keep a solid paper trail in case the CRA asks you for supporting documents.

Yes, thanks for that; I've looked into that as well.  My current dilemma is do I sell the rental or keep it (at least for 2 more years).  My gut says sell but for some reason I'm hesitating and so wondering if there is any other way to make it more advantageous, while keeping the rental.

lostamonkey

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Re: Should we sell our paid-off rental in Ottawa?
« Reply #5 on: August 09, 2015, 09:45:43 PM »
I believe that you are asking two questions in your post:

1. Should you sell your rental property?
We need to know how much it rents for to provide advice here.

-Rent is $3250/mth.  Monthly costs we pay are ~ property tax $520; utilities $550; insurance $100; and then occasional maintenance costs but those are minimal as house is only 7 yrs old.

Because of owning the rental, we also have the primary residence mortgage cost that would disappear if we sold, of $2500/mth, of which >$1000 is interest. 

2. Can you make your principle residence interest deductible?
Yes, you can. The CRA requires the money received from a loan to be used to earn interest, rental, or dividend income in order to be deductible. Your principle residence provides none of this type of income. You could sell your rental property, use the proceeds to pay off your principle residence mortgage, take out a new mortgage against your principle residence and use the proceeds to buy Vanguard ETFs. Your interest is now deductible. Ensure to keep a solid paper trail in case the CRA asks you for supporting documents.

Yes, thanks for that; I've looked into that as well.  My current dilemma is do I sell the rental or keep it (at least for 2 more years).  My gut says sell but for some reason I'm hesitating and so wondering if there is any other way to make it more advantageous, while keeping the rental.

I don't know a lot about real estate investing but one thing I hear a lot about is the 1% rule. This means that a good rental property should yeild atleast 1% of the market value less selling costs in monthly rent. Your property does not meet this criteria.

Another thing you will have to consider is if you sell your rental property, do you want a paid off mortgage on your principle residence or $500K in investable assets? There have been many threads on this topic and the general consensus is that you will come out way ahead by investing but some people are willing to give up the extra dollars for the peace of mind of a paid of property.

Another thing to consider is recapture of CCA. Have you claimed depreciation on your property in the past? If so, you will have to add all the previously claimed depreciation to your current year's return. You may also have a capital gain on your rental property. Unfortunately there is no way to avoid this tax in Canada.