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I bought a duplex. I live in one of the units and I rent the other unit.

When I filled my taxes report, mortgage interests could be deducted for the part of that property which brings income, 50%.

From my understanding of the Smith Manoeuvre, I could use a HELOC to borrow back the capital I pay each month and invest that money.

But does that mean I'll be creating a 100% tax-deductible mortgage with an already 50% tax-deductible mortgage?

I'm trying to make sense out of this... If the property was 100% rented, then the interests would already be 100% deductible. If the property was 0% rented, then none of the interests would be deductible, which is the purpose of Smith Manoeuvre to switch that to 100% deductible. But what's the strategy when it's 50% deductible?

And what about the taxes on the capital gains? If I sell the duplex, I'll have to pay taxes for capital gains on 50% of the property since 50% was used for income. Is there any trick that can be used there?

Thanks.
 

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From my understanding of the Smith Manoeuvre, I could use a HELOC to borrow back the capital I pay each month and invest that money.

But does that mean I'll be creating a 100% tax-deductible mortgage with an already 50% tax-deductible mortgage?
My guess is that you can deduct interest for the rented half of RE from RE income, and you would be able to deduct interest for the investment part from investment income.
 

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I think you should consult with an experienced tax specialist. If you rent out less than 50% of your property, you retain primary residence status, and thus, tax free capital gain. If you rent out 50% or more of your residence, it is taxed just like a rental property even if you live there too. An accountant is very wise in this situation so you know what is coming around the turnpike.
 
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