Is my Mortgage Interest a Tax Write off?
Written by the The Calgary Mortgages .CA Crew
Let’s face it, paying tax is no fun and we all want to work to pay as little tax as possible and take advantage of tax savings where we can. During tax season, every year, it’s important to consider anything that could be a write off against your income. One of the big questions that you might have is, “can I write off the interest on my mortgage?” The answer is, it depends. Let’s talk about some scenarios that could allow for mortgage interest write offs.
Writing off Mortgage Interest on a Rental Property
If you own a rental property and you are collecting rent from tenants, you can write off the mortgage interest as an expense. Here is a quick example of how that works:
Rent coming in: $1800/month
Mortgage payment: $1400/month, $700 is principal reduction on the mortgage and $700 is interest on the mortgage.
You would only pay taxes on $1100/month, not $1800 in this case, because the $700 you pay each month in mortgage interest is a write off against your property.
Writing off Mortgage Interest on a Personal home
There are 3 scenarios that might allow for the mortgage interest on your personal home to be deducted from your income; working from home, renting your home or a portion of it and borrowing to invest. Let’s talk about them!
Writing Off Your Mortgage When You Work From Home
First, working from home. If you own your own business and you use a portion of your home to earn business income, you are entitled to some mortgage interest write offs, as well as write offs for expenses like utilities, property taxes and insurance. This math can get a little tricky, so here is an example. If your mortgage interest totals $10,000 for the year on the entire house, but your home office is only occupying about 10% of the home and you only work 200 days per year, here is the equation we’re working with:
$10,000 * 200/365 * 10% = $547.95
This means that you would have a tax write off, on mortgage interest for $547.95 for the year.
Writing off your mortgage when renting
This means that you would have a tax write off, on mortgage interest for $547.95 for the year.
These same equations are necessary when we look at renting your home, either the entire home or a portion of your home. If you’ve rented your entire home for a year, then really, it’s treated as a rental property, as discussed above. But, if you’ve rented your home for just a portion of the year, then you can only write off the mortgage interest during the months that the home was rented. To use the same example, if you rented your home for 6 months then the equation would be:
$10,000 * 6/12 = $5,000
If you rented a portion of your house, let’s use 25% of it, for example, for 6 months of the year, then the equation would be:
$10,000 * 6/12 * 25%= $1,250
You would be able to write off $1,250 of your mortgage interest against your rental income.
Condos vs. Single Family Homes
The last scenario that could benefit your tax return could be borrowing to invest. Many Canadians have Home Equity Lines of Credit on their home once they have paid down their mortgage. A Home Equity Line of Credit allows you to pull the equity from your home like it’s a chequing account. Many borrowers will use these funds to invest in stocks, bonds or mutual funds. Because the borrowed funds are being reinvested in the economy, the Canada Revenue Agency allows for the interest you’re paying on the borrowed funds to be written off against income. If you’re using this strategy, here are a few things to keep in mind:
1. The accounting has to be clear and concise. If you are using your Line of Credit for investing, as well as other day to day expenses, it will be very hard to track what interest should be written off and what interest should be your expense. Make sure that your bookkeeping is clear and up to date so that if you were to be audited, you can prove your case.
2. Borrowing to invest can be risky. Make sure that you’re speaking with your accountant, financial planner and mortgage broker so that your entire team is on the same page.
3. Borrowing against the equity in your home to invest doesn’t mean the funds have to be invested in Stocks and Bonds. You could borrow to invest in a rental property, a start up business or any other variety of investment opportunities. The key is just making sure that your paper work is in order for tax time.
Writing your mortgage off conclusion
Working with your finances to find opportunities for taxes write-offs can be a great way to save a few thousand dollars at tax time, but it’s important that you’re playing by the rules. A great team should include an experienced accountant, financial planner and mortgage broker. They should be able to help you navigate this mortgage interest landscape in the most advantageous way for your specific situation.
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