How to Deduct Mortgage Interest from Your Taxes

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Deducting Mortgage Interest from Your Taxes

Tax deductions can be an exciting topic for many Canadians. They are specific expenses that you incur during the course of the tax year and can deduct from your taxable income to reduce the amount of money you are required to pay in taxes.

When it comes to your mortgage, one of the most commonly applied tax deductions is used to write off a portion of your mortgage interest payments. However, not all Canadian homeowners qualify. In this section, we explore the requirements for making use of this little-known tax shield.

Please note that we are not qualified accountants or tax specialists and are not providing you with tax and accounting advice. Please review the information provided in this article with your tax and accounting specialist prior to utilizing any of the ideas that are presented here.

What Counts as a Tax-Deductible Mortgage?

In Canada, there are two scenarios in which you can write-off your mortgage interest payments from a tax perspective. The property must meet one of the following criteria:

  1. It is your primary residence
    If you live in the US, you can write-off your interest payments regardless of whether your property is a house, co-op, condo, apartment, mobile home, houseboat, or something else entirely. The only caveat is that your home must have been used as collateral for the loan and must contain essential living amenities such as a place to sleep, a kitchen, and a bathroom in order to be considered.
    Unfortunately for Canadian homeowners, in Canada, most residential properties are not tax-deductible. There are however a few loopholes through which you may be able to utilize to write off some of your mortgage interest.
    The Smith Maneuver is a commonly used tax strategy amongst Canadian homeowners. It hinges on the following principle: although mortgage interest is not tax deductible in Canada, investment loan interest is.
    In order to convert your mortgage into an investment, you can obtain a re-advanceable mortgage. This is a combination of a traditional mortgage and a home equity line of credit (HELOC). Every month, once you pay off your interest fees, take out the same amount of money through your HELOC and re-invest it in an investment that qualifies for tax-deductions. Please consult an accounting or taxation specialist prior to executing this or any strategy presented in this article.
  2. It is currently generating rental income
    If you borrow money to purchase or repair a rental property, you can deduct the interest you pay on that loan. This means that a portion of mortgage interest is tax-deductible on many Canadian rental properties.
    The total amount of your mortgage interest is only tax deductible if you rent out your entire property for the entire year. If this is not the case, only the portion of the property and the portion of the year you rent it out (e.g. six months) might qualify for tax deductions for interest payments.
    You will not receive credit for your full interest amount if you are only renting out a portion of your home. In such cases, mortgage interest write-offs will be allocated proportionally using square footage as a measure.

Fortunately for Canadian landlords, mortgage interest is not the only expense that is tax-deductible. Some other expenses related to the purchase or renovation of the property can provide you with tax benefits. This might include:

  • Fees related to your mortgage application, processing, and appraisal
  • Mortgage insurance fees
  • Brokerage and accounting fees
  • Legal fees related to home financing
  • Limitations When Deducting Your Mortgage Interest

When deducting your mortgage interest, it is important that you follow the rules and procedures set out by the Canadian government to ensure you qualify for all your earnings. When writing-off interest or renovation expenses from your rental property, for instance, you want to make sure you use the rental income and expenses on Form T776.

Another important limitation is the nature of your property’s use. If your property was not used as a rental property, it might not be eligible for tax deduction. Strategies like the Smith Maneuver may serve as legal workarounds to achieve similar results; however, they are not fully able to exempt residential properties from their tax obligations.

Common Misconceptions: Deductions and Taxes

Only Rented Homes Have Tax-Deductible Mortgage Interest

The government-backed tax benefits of owning and operating a rental property also extend to other types of business operations. If you are operating a legal business or providing a professional service through the property, you may be entitled to a tax-deduction of your mortgage interest. You might also be able to deduct office costs, advertising fees, and even employee salaries. If you are working a remote job, you might even be able to write-off your in-home office as a business rental in certain circumstances.

Despite this, there are still many advantages to renting out your properties. Perhaps the greatest advantage of leasing out your home is that anyone can do it as long as it does not breach your mortgage agreement. While other businesses may have greater eligibility for tax shields, landlords have one of the oldest and simplest business models in play.

You Cannot Tax-Deduct Your Interest After Refinancing Your Home

Your eligibility for mortgage insurance tax-deductions is based almost solely on the property’s use and income generation. If you refinance your property, you might still be able to write-off your insurance payments, so long as the property is still being used to generate income.

If you are cutting yourself out of the mortgage contract completely, and ceasing insurance payments, the new payee might be able to inherit your tax benefits.

Working with a Brokerage is a Waste of Money

Whether you are looking for tax-deductions, better contract terms, or more, working with a mortgage broker can significantly increase your odds of success.

The mortgage brokers at Clover Mortgage can help ensure that the mortgage product you are getting is suitable for investment properties. If you are planning on renting out part or all of your property, allow us to help make sure that you will not be putting yourself into default with your mortgage lender.

That’s right, with many mortgage lenders, your mortgage agreement will stipulate that you are not allowed to rent any part of your property otherwise you will be putting yourself into default and the lender has the right to call the loan or put you into power of sale. Our brokers are trained to watch out for clauses in the mortgage commitment that might hurt you in the long run.

Clover Mortgage prides itself on having strong working relationships with over 50 different mortgage lenders. This allows us to find the mortgage the best suits your individual needs and helps you achieve your financial goals. Let us help you save thousands of dollars over the term of your mortgage.

Contact Clover Mortgage to book your free consultation today!