Sorry for the confusion. The current property is free and clear and will be remortgaged to purchase a new house. The original house will be rented out after the family is in the new house.He's asking whether the interest on the mortgage that he takes out on House No. 2 (now rented) in order to buy House No. 2 (principal residence) can be deducted, and the answer is no (in terms of the way the problem is structured).
Thanks for your reply. I am familiar with cash damming as I am currently doing it. The major expense to be deducted is the mortgage interest. That is why I am trying to make this happen.I think Moneygal is right. Mortgage interest in Canada is not tax deductible. To make the interest tax deductible you need to borrow for the purpose of investing. Since the mortgage in this case would be used to purchase a principal residence the mortgage interest would not be tax deductible.
If you are determined to keep house #1, the only way I can think of to accomplish deductible interest would be to set up a cash flow dam. There was a good thread in this forum a few months ago about cash flow damming.
The easiest way to accomplish your goals of owning two properties and having a loan with tax deductible interest would be to sell house #1, use the proceeds for house #2, then take the equity from house #2 to purchase an investment property.
Unfortunately the interest in this case is not tax deductible as the funds from the mortgage are not being used to generate income.Your question is about mortgage and a tax, right? Well, every time you make a mortgage payment, a portion of the payment is applied to interest, while the rest is applied to principal. The interest on the loan is tax deductible which makes the effective interest rate on the loan even better.