Some Canadians: want to make your mortgage interest deductible?

joyfulguyMay 7, 2009

Suppose you have a $300,000. house, $100,000. mortgage the proceeds of which you used to pay for your owner-occupied home. While our U.S. friends can deduct their mortgage interest, we can't ... but we do get the capital gain free of tax, when we sell it.

Suppose you have $150,000. worth of non-RRSP investments.

Suppose you sell $100,000. value of investments, then use the money to pay off the mortgage (supposing that your contract permits it).

Then, make a new mortgage for $100,000. and use the proceeds to buy back the stocks that you just sold, or whatever other ones you choose, but not ones to put into an RRSP (and maybe not ones to put into the new Tax-Free Savings Accounts, either).

When you borrow to invest in non-RRSP assets ... the interest is deductible.

Last mortgage ... you used the money to pay for a house ... interest not deductible.

This mortgage ... you used the money to buy stocks (or, if you don't know how to manage the stocks yourself, to pay 2.5% or more per year to a mutual fund manager to run your mutual funds ... and he gets his, whether he makes anything for you or not) ... making the interest deductible.

There are costs associated with the selling and re-buying of the stocks, and for having the certificates of ownership registered and issued, if you want to use them as collateral to back the loan.

But don't borrow more than a quarter to a third of the value of the asset that suports the loan. Banks will usually lend up to 50% ... but if the stock prices drop, say 40%, as many did recently ... if you're near your limit, you have big-time trouble ... right here in River City!

Let's say you had $100. worth of stocks, the bank was willing to lend up to $50., maybe $60., so you borrowed $40.

Stock prices go down 40% ... the $100. value is now worth $60. ... so the bank will be willing to lend $30.00 ... and if you have to put up more asset or cash, they'll want some extra.

They want either about $25. - 30. more value in fresh stock certificates ... or they want a minimum of $10.00 cash to pay down your loan ... and they'll more likely ask for $12. - 15., to give some cushion.

And they want it today ... tomorrow at the latest.

Don't tie yourself into that kind of a box!!

Not ever!!

As I've said before ... learning how money works ... an interesting hobby ... that pays well.

ole joyful

P.S. Boss your Dollars ... or they'll boss you!

o j

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dave_donhoff

Hi OJ,

Great tip... and perfectly applicable in the lower 48 (plus AK, HI, territories & district) as well! ;~)

Its all in "the papertrail."

Document that you've borrowed funds for the PURPOSE of investment, and 100% of the interest costs are deductible off THE TOP LINE (the gross revenues, not the net,) as a cost of business. This is without regard to what property you may choose to use as collateral for the loan (so a loan collateralized by stock, or a loan collateralized by your personal residence... BOTH enjoy 100% top-end deduction as a business expense against investment revenue, as long as the funds are used for investment.)

In the U.S.... although we have a traditional mortgage interest deduction for INCOME taxes when we use leverage for residential purchase (up to $1MM purchase money, and up to $100k cashout equity money...) the deduction is at a mirror percentage to our marginal income tax percentage...

This means that if you are in a 15% marginal income tax bracket, you get to reduce your taxes by 15 cents for each dollar of mortgage interest you pay.

If you are in a 25% marginal income tax bracket, you get to reduce your taxes by 25 cents for each dollar of mortgage interest you pay.

This applies to the interest you pay on any purchase money mortgage up to $1MM (interest on purchase leverage above $1MM isn't deductible at all.) IT also applies to interest you pay on equity cashout refinance money leverage up to $100,000 (any interest on equity loans without a defined investment reason greater than $100k is not deductible.)

HOWEVER.... as you just pointed out....

A) Cash in your market investments to liquidate,
B) Use said cash to retire all mortgage balances,
C) RE-borrow the funds (perhaps now even at a significant discount interest rate also... double bonus?)
D) RE-acquire your desired investment positions.

In doing so;
1) Canadians will make your mortgage interest 100% deductible when it wasn't at all before,
2) United Statesians will make your mortgage interest 100% deductible when it was only partially deductible before.

ADD TO THIS... in the U.S. tax code there are also sometimes benefits for "booking losses" by selling an investment that is "down" and thereby formally recording the loss. Such "realized losses" can be used to offset other gains... and if you didn't prove the loss by the sale, you would suffer the loss anyway, yet STILL pay the tax on other upside gains.

Another strong example why the proper structuring of one's finances from the "big picture" holistic perspective is so critical.

"Divide and conquer" is a recipe for poverty in finance.

Cheers,
Dave Donhoff
Leverage Planner

    Bookmark   May 10, 2009 at 2:55PM
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