Personal vs Investment Debt

[Torontoskov]

This Q is more down a CA alley...

I would like to pay down all my personal debt using cashflow from my investment property. In order to do this I will borrow to pay the mort/taxes/ins on the investment property while diverting all rental proceeds to personal debt reduction. 2 problems.

It`s unlikely I can get a brand new LOC in order to seperate the new debt....so I will be essentially borrowing from personal LOC to pay mort/tax/ins while depositing rent income. The balance will not decline but the portion attributed to persoanl debt will. I realize the admin. nightmare to track int but my intentions are good sound financial mgt (as if CRA cares). I believe this is co-mingling of debt.

Also, can I borrow to make an interest pymt on my investment debt and still write this off?

You help in this matter is most appreciated. My accountants away.

 

[Thomas Beyer]

QUOTE (Torontoskov @ Mar 9 2009, 12:17 PM) ...

I would like to pay down all my personal debt using cashflow from my investment property. ...

Also, can I borrow to make an interest pymt on my investment debt and still write this off?
You MUST separate the two as per CRA .. i.e. have a personal LOC and a business LOC !!! physically separate i.e. two different accounts !!

 

[Torontoskov]

QUOTE (thomasbeyer2000 @ Mar 9 2009, 11:48 AM) You MUST separate the two as per CRA .. i.e. have a personal LOC and a business LOC !!! physically separate i.e. two different accounts !!

Perfect, thank you. I thought would be the case...now it`s off to the bank to squeeze that Investment LOC some more. Of course now when I do that they will raise the rate from Prime to Prime + .5 as it`s considered new business and cannot be added on......then the Q is the extra .5% worth it for the future int write off. Excuse me while I get a gun!

 

[Al Verwey]

Here`s my take on the situation. What you are trying to do is the Smith Manouevre which has passed the scrutiny of the CRA and tax courts.

The success of it depends upon whether your real estate business is incorporated or not. If not, and you are holding your real estate in your personal name, then you can do this manoeuvre with your existing LOC. However, it must be set up in such a way that as you reduce the principal on your non-deductible loan, the required payment goes down as well. Otherwise, if you are increasing the amount of your tax deductible debt (by paying your business expenses/mortgages on your rental properties from a seperate LOC) then your overall payments will be rising every month. The idea is to keep your total debt the same, but change the proportion of deductible vs. non-deductible debt.

If you are claiming the income and expenses against your personal income on your tax return, then you should be able to do this, as I have done since I began RE investing. But of course, check with your accountant first.