In this episode of Get Real Wealthy Season 2, Quentin talks about making your mortgage tax-deductible.
Quentin says that this episode is specifically for Canadians. As for the Americans listening to this, their principal residence mortgage is already tax-deductible. One of the ways to convert non-deductible debt to deductible debt is by using the Smith Maneuver strategy. There are a few different things that you want to consider when it comes to this strategy. Number one, talk to your accountant and make sure that you get professional advice. Then, spend some time figuring out what the benefit of this is going to be overtime for you. As for the process, you’re taking a mortgage on your principal residence that has a home equity line of credit on it. As you pay down the principal, your home equity line of credit grows. The way that you can do this is by using the home equity line of credit to invest in a rental property. So, when you take the funds from the home equity line of credit, and you use it to purchase a rental property, the interest on the home equity line of credit now becomes tax-deductible.
Quentin adds that there are a number of different things that you can do with rental properties that would accelerate the process of making your mortgage tax-deductible. So, as you pay for the principal residence, the line of credit becomes available. As long as you can do additional payments on your principal in that home equity line of credit, you end up converting your debt quickly from non-deductible that deductible debt. As for the drawbacks, one consequence of the strategy is that the borrower’s net debt remains the same after many years, rather than being paid down. The second drawback is there never really is a strategy to pay this off. The third drawback is that when you decide to actually pay the interest back then you lose that deduction.
In conclusion, he says that this is something that you want to keep in mind, both the benefits and some of the drawbacks associated with this strategy, so that you can make an informed decision that is best for you.
Quentin D’Souza is the Chief Education Officer of the Durham Real Estate Investor Club. Author of The Action Taker's Real Estate Investing Planner, The Property Management Toolbox: A How-To Guide for Ontario Real Estate Investors and Landlords, The Filling Vacancies Toolbox: A Step-By-Step Guide for Ontario Real Estate Investors and Landlords for Renting Out Residential Real Estate, and The Ultimate Wealth Strategy: Your Complete Guide to Buying, Fixing, Refinancing, and Renting Real Estate.