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Hi : I just need some quick inputs here . .
I am planning to use a portion of my HELOC ($10,000) to pre-pay part of my existing mortgage. Thereafter, I plan to make regular payments to my HELOC loan. Are interest payments to my HELOC loan tax deductible? I'm a bit of a newbie here and will need some advice. Thanks
 

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The OP probably referred to a principal residence mortgage, but what if the mortgage was for a rental property? I know the interest on that mortgage would already be tax deductible, as is interest on a loan used to pay that mortgage interest. But if you borrow in order to make principal payments, is that loan's interest also deductible?
I had assumed that it wasn't, and have only been paying the interest portion of the mortgage payments out of my cash dam HELOC. But maybe I'm wrong, perhaps the entire mortgage payment on the rental can be paid out of the HELOC and still keep it 100% deductible interest?
 

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Some accountants will mistakenly tell you that a loan to pay the principle on an investment property mortgage is non-deductible. It is, however. Think of it as refinancing the investment loan. Just keep in mind only the interest portion of the mortgage payment is tax deductible, because the principle payment is not an actual expense but a loan repayment.
 

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Some accountants will mistakenly tell you that a loan to pay the principle on an investment property mortgage is non-deductible. It is, however. Think of it as refinancing the investment loan. Just keep in mind only the interest portion of the mortgage payment is tax deductible, because the principle payment is not an actual expense but a loan repayment.
Ok, so if the principal portion of mortgage payments (which I assume also includes voluntary lump-sum payments) is considered a loan repayment, then it must be for the loan that was given for the purpose of buying the property, right? You're just repaying that original loan, and the purpose of that original loan is to earn money, and thus its interest is tax-deductible.
Now, according to paragraph 41 of IT533:
Where borrowed money is used to repay existing borrowed money or an amount payable for property acquired, the new borrowed money is deemed to have been used for the purpose for which the money previously borrowed was used or to acquire the property upon which amounts were owing, as the case may be, by virtue of subsection 20(3).
So, under your premise that the principal payments are considered a loan repayment, if I borrow money to pay this principal then I am simply borrowing money to repay existing borrowed money. According to this bulletin, the new borrowed money should then be considered to be for the purpose of buying the property, and thus its interest is also tax deductible.

Either your premise is flawed (that principal payments = repayment of original loan) or your conclusion is wrong. The bulletin is pretty clear, and my logic is pretty straightforward.
 

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Or I mis-interpreted your conclusion. You actually only said that the principal payments were not tax-deductible themselves, but my question was actually in regards to the deductibility of interest on a loan used to pay the principal portion. Maybe we just weren't on the same page!
 

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I've been told by an accountant that the cash damn works for the whole mortgage payment, not just the interest on the mortgage. In other words, you can use a line of credit (LOC) to make your rental mortgage payment, and the interest on that LOC is tax deductible.
 

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As Ed Rempel has said before, the interest on loans to pay both the principle portion and the interest portion is deductible, each for a different reason. The interest is a business expense (and you can claim this as a deduction), so the interest on any loan to pay for this expense is deductible. For the principle portion, while the principle payment is not an 'expense' (it is a repayment) and thus not tax deductible, the interest on a loan to repay this mortgage (which was itself an investment loan) is also deductible.

Hopefully that was clearer. And yes, Elbyron, we're agreeing, it's just complicated to express.
 
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