Posted by John Doe
Since our neighbours in the United States are able to deduct mortgage interest from their tax payments, many Canadians are curious about whether they can do the same. Unfortunately, the tax laws in Canada differ in that mortgage interest is not deductible.
However, there is one way you can deduct mortgage interest, and that is if you are using all or part of your house as a rental property. This would classify your home as an investment property. You can deduct mortgage interest on any investment property you own.
In order to claim deductions on any part of your mortgage interest, your property will need to generate some sort of income. You can claim rental income, and expenses such as repairs, renovations, and utilities, on your tax form. All rent collected from tenants is income, while any expenses associated with the property can be deducted. Other expenses may include home insurance, mortgage insurance, property taxes, and any money spent advertising the property. If the entire property is rented, you can deduct 100% of these expenses. However, if you live in part of the property you can only claim the percentage of the property which is rented out.
When it comes to your mortgage, you may deduct mortgage interest paid on the property, but cannot claim any tax deduction on your mortgage principle. You can also deduct closing costs and any fees paid to mortgage professionals, application fees, appraisal fees, and legal fees.
You may also deduct interest from money borrowed to finance home improvements, construction, renovations, and other upgrades to your rental property. These are defined by the Canada Revenue Agency as “soft costs.” Before you make any deductions related to these kinds of costs who should confirm that they fall under that category.
When it comes to deducting mortgage interest for a rental property, it’s best to seek the advice of a mortgage professional. You want to ensure that you are filing your taxes properly, and saving as much money as you can.
As we’ve said above, you can’t claim any deductions on your mortgage principal. Sometimes homeowners can get confused about what part of their monthly payments are interest, and what goes directly towards their principal. This is very important to understand when it comes to mortgage interest deduction, as you have to make sure you are deducting the right amount and filing your taxes properly.
Your mortgage principal is the total amount you have borrowed from your lender. Your monthly payments go towards paying off this amount. With each payment you make, your mortgage principal shrinks while your home equity (which is the percentage of the home you own outright) grows.
On each monthly payment that goes towards your principal, you must pay a small percentage of interest. This goes to the lender. You may have a fixed or variable rate mortgage. In a fixed rate mortgage, your monthly payment stays exactly the same. This means you pay the same percentage of interest, and the same amount towards your principal. Fixed rate mortgages are favoured due to their predictability, and make for easier financial planning, allowing you to avoid any unexpected spikes in the market.
With a variable rate mortgage, your monthly payment remains the same but the interest rates fluctuate according to the market. This means that depending on the interest rate, you will end up paying slightly more or less towards your principal each month. Experienced property owners are more likely to choose a variable rate mortgage as it can allow you to take advantage of lower interest rates, and gives you more flexibility in terms of breaking your mortgage or refinancing.
Whether you have a fixed or variable rate mortgage, you will need to find out exactly how much is going towards your principal each month, and how much is going to the lender as interest paid. When deducting mortgage interest, be careful to deduct only the exact amount of interest paid each month rather than including any of the principal payment.
The bottom line when it comes to deducting mortgage interest is that, in Canada, you can only deduct mortgage interest on an investment property, which means a property that generates income. You cannot, unfortunately, deduct mortgage interest from a mortgage on your principal residence. In order to claim tax deductions, your property must generate taxable income.
It is always important to be sure you are filing your taxes correctly. If you are unsure about deductions related to mortgage interest, contact a mortgage professional today. They will be able to advise you on what you can and cannot deduct, and may be able to offer money-saving tips, or advice on paying your principal off faster. When in doubt, seek the help of a professional!