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Discussion Starter #1
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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Is your duplex consider one title or two? If it’s two, you don’t have To worry about eligibility.
 

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Discussion Starter #7
I'm not sure? It is one property with two civic numbers.
 

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If you start renting out a few rooms or the basement of your house without making any structural changes and claim no CCA you are likely OK as far as CRA and claiming the PRE on the whole house. However if the unit is specifically build as a secondary suite, you cannot claim PRE on the whole house. In the OPs case this appears to be a duplex and built as such so he can only claim PRE on the half he lives in.

To the OP - did you buy the house as one title. In other words was it two separate RE transactions or simply one. Could you sell just the rented part of the duplex?


From the PRE doc from CRA
Partial changes in use
2.57 If a taxpayer has partially converted a principal residence to an income-producing use, paragraph 45(1)(c) provides for a deemed disposition of the portion of the property so converted (such portion is usually calculated on the basis of the area involved) for proceeds equal to its proportionate share of the property’s fair market value. Paragraph 45(1)(c) also provides for a deemed reacquisition immediately thereafter of the same portion of the property at a cost equal to the very same amount. Any gain otherwise determined on the deemed disposition is usually eliminated or reduced by the principal residence exemption. If the portion of the property so changed is later converted back to use as part of the principal residence, there is a second deemed disposition (and reacquisition) thereof at fair market value. A taxable capital gain attributable to the period of use of such portion of the property for income-producing purposes can arise from such a second deemed disposition or from an actual sale of the whole property subsequent to the original partial change in use. An election under subsection 45(2) or (3) cannot be made where there is a partial change in use of a property as described above.
2.58 The above-mentioned deemed disposition rule applies where the partial change in use of the property is substantial and of a more permanent nature, that is, where there is a structural change. Examples where this occurs are the conversion of the front half of a house into a store, the conversion of a portion of a house into a self-contained domestic establishment for earning rental income (a duplex, triplex, etc.), and alterations to a house to accommodate separate business premises. In these and similar cases, the taxpayer reports the income and may claim the expenses pertaining to the altered portion of the property (that is, a reasonable portion of the expenses relating to the whole property) as well as CCA on such altered portion of the property.
2.59 It is the CRA’s practice not to apply the deemed disposition rule, but rather to consider that the entire property retains its nature as a principal residence, where all of the following conditions are met:
a) the income-producing use is ancillary to the main use of the property as a residence;
b) there is no structural change to the property; and
c) no CCA is claimed on the property.
 

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Discussion Starter #9
However if the unit is specifically build as a secondary suite, you cannot claim PRE on the whole house. In the OPs case this appears to be a duplex and built as such so he can only claim PRE on the half he lives in.

To the OP - did you buy the house as one title. In other words was it two separate RE transactions or simply one. Could you sell just the rented part of the duplex?
Yes, it is a duplex of two totally separate and autonomous units and I bought it in one transaction.

When I did my taxes for the first time this year, I weighed it 50% as my main property and 50% as a rented property. I also claimed CCA.

So I could do a Smith Maneuver but on 50% of the property? The other half is already tax-deductible. Not sure how that would work for Smith Maneuver.
 

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My understanding is the Smith Maneuver allows you to convert a regular mortgage into a tax deductible mortgage in order to offset any investment income.
Currently, 50% of the interest on your current mortgage is used to offset the income of your property. Converting the mortgage using the SM simply allows you deduct the other 50% on other investments. If you have no capital gains, dividends or interest generating savings, then you have nothing to offset.
 
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