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Using investment property equity for retirement income?

6K views 16 replies 9 participants last post by  Nerd Investor 
#1 ·
Hello,

Quick question for anyone willing to take a look...

Let's say Im retired, I have investment savings and a rental property. Can I use the equity in my investment property to draw as retirement monthly income? Let's say I put a HELOC on it - Is the tax deductible in this case?

Thanks,

G
 
#2 ·
It's not a good idea because your rental business is suppose to be a separate entity from you, even if unincorporated, and things get dicey if you start mixing the two. If you do put a HELOC on the rental property, which you draw for your personal benefit, then that interest is not deductible as it isn't a business expense. The exception would be if you used the loan to purchase business assets, such as stocks, or another property.
 
#3 ·
What Market Lost said.

There are basically three ways to generate income from a rental property.
1. When cash flow (rent minus expenses) is positive. A good investment property should be at least cash flow neutral from day 1. When the mortgage has been discharged, net cash flow greatly increases. This is taxable income.
2. Sell the property, generating a one-time lump sum. After paying off any remaining mortgage, there may be capital gains tax and recapture of depreciation to pay.
3. When you have significant equity in the property, refinance it for a larger amount. This cash will not be taxable AFAIK. My bank recently called me several months prior to the end of a mortgage term to offer a new, lower rate, and invited me to refinance. I declined, because I would prefer to get the mortgage paid off more quickly and exercise option 1.
 
#4 ·
The only time you can deduct the tax on borrowed money is if the money were used for investment purposes. So, when you buy a rental property, it's important to borrow as much money before you purchase as possible. If you put your money into the down payment you can't get it back out later.

This is why I purchase using a heloc (either for the full purchase or at least the down payment). You are allowed to change the terms of the loan (refinance) and keep the money tax deductible, as long as it all remains balanced and traceable, but you can't take out more to "repay" yourself for the down payment.

The same is true for renovations. You can borrow to improve the property, and deduct the interest, if you do it properly.
 
#6 ·
Isn't this just a cash dam scenario?

Use the monthly revenue from your rental property as your personal retirement income, and set up a HELOC on the property which you will use for all expenses related to that property only. All of the interest on this debt is tax deductible because it was generated via business expenses. Of course your overall debt goes up, but that's what you proposed in the first place by taking out equity.
 
#9 ·
It does because interest on rental property is highly restricted in what you can write off. I was also a CPA for a decade, so I'm not just talking out my hat, I've had to deal with these situations many times. Just about every property owner I dealt with thought they could use their rental as a licence to write off what ever they felt like. This is a sentiment that CRA doesn't agree with.
 
#10 ·
Market Lost - can you give some examples of things your clients 'thought' they could write off but were disallowed by the CRA?

Cash damming is a well known strategy used by rental property owners and, to my knowledge, is completely legit with the CRA. It's simply based on the fact that there is no Canadian law that says business revenue must be used to pay expenses for that business. Instead owners use rental income to pay down their non-deductible personal mortgages (or in the OP's case, he would use it as his retirement income) and pay their business expenses using a LOC which creates tax-deductible interest. No shady expenses, just the usual things like property tax, maintenance costs, utilities, etc.

http://mortgagepal.ca/rental-cash-damming/

http://www.milliondollarjourney.com/the-cash-flow-dam-explained-cash-damming.htm
 
#12 ·
Make sure you understand what you bank wants to loan you in retirement. They do not consider real estate equity as an asset. My friend in Toronto wanted to mortgage his house in The Beach to buy a home in Collingwood and then rent out the home in Toronto. No dice says the bank! Show us the rental contract (preferably 5 years) on the Toronto home before you get any money.
 
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