Make Your Home a Tax-Deductible Asset
By Cathie Dalziel
Professional Mortgage Advisor
Mortgage Alliance / Mortgage Maxx Inc.
There are two strategies for creating a tax-deductible mortgage:
(1) If you have an existing mortgage on your house, you can make all or part of it tax-deductible through an asset swap. Now most people who have mortgages also have various forms of investments, like mutual funds. The idea is to take these assets and swap them for mortgage debt.
Do it this way:
First, sell your investment assets. Cash them in, being mindful there will be a small tax bill to pay on any capital gains you realize.
Second, use this cash to pay off your residential residential mortgage (or a portion of it). If you are buying a new home you skip this second step.
Third, arrange a new mortgage.
Fourth, use the new mortgage money to buy back the investment assets you originally sold. Now you still own an equal amount of investment assets, and you still have a mortgage on your home. But because you borrowed against your home (in the form of a mortgage ) in order to buy assets that create wealth, the interest on your mortgage is now tax-deductible. You have just given yourself a giant tax break.
(2) If you live in a house with no mortgage, it’s even easier to build wealth and still get a fat tax reduction, using a home equity loan.
You can generally borrow up to 75% of the appraised value of your home with an equity loan. The good news is that because the loan is well-secured by the real estate, you can get it at a rock-bottom rate of interest, generally the prime rate. Even better news is that, so long as the money is used for investment purposes, to create wealth you’ll be taxed on later, the interest can be written off.
To make this simple and effective, most lenders will allow you to have an interest-only payment, which means you never actually pay back the principal amount borrowed. Why would you want to, when the entire cost to you is deductible from your personal taxable income?
So, instead of just having a house with no mortgage, you end up with an investment portfolio that could be worth tens, or hundreds of thousands of dollars, plus the ability to substantially reduce your taxable income.
If you borrow to invest in growth assets, like stocks or mutual funds, the interest is tax-deductible. You get a significant tax break at the same time your equity is put into things that will mushroom in value over the coming years. So, how do you cope with the cash flow demands of having a home equity loan in place? After all, you need to make interest-only monthly payments.
The answer is a SWP (pronounced swip), or systematic withdrawal plan. With the help of a mortgage advisor advisor, do the following: Arrange a home equity loan in the form of a line of credit, with interest-only monthly payments (you should avoid taking this money in the form of a mortgage, with blended payments of both interest and principal). Your payments are now entirely deductible from taxable income, so long as you put the money in the right place.
Use the funds to buy units in equity mutual funds. (Some people feel more comfortable with segregated funds, since they want a guarantee there will never be a loss - however higher fees will impair fund performance.)
Have your financial advisor set up a SWP, which means enough money can be taken from the fund on a systematic, monthly basis to cover off the interest-only payment on the home equity loan. Now the mutual fund is actually making the loan payments, rather than you. But every year when you fill out your tax return, the interest is deductible in your hands!
Held long enough (a minimum of five years), the mutual fund should give you substantial capital growth, despite the fact you have removed money through the SWP to cover all financing charges. It’s a win-win situation: the HELOC is good debt and the SWP is a great way to finance it.
You may well buy assets with a HELOC that temporarily fall in value. But because your loan is secured by the value of your home, and not the value of the funds you buy, there will never be a margin call to make up the shortfall (as is the case with borrowing money to buy stocks from a broker). Meanwhile, of course, you continue to write the interest on the loan off your taxable income, for a net benefit.
Finally, you will never take a loss on funds that have gone down in value unless you take the wrong advice, and sell. The proper strategy is to wait out any market correction and ignore the scare-mongers who confuse short-term events with long-term trends.
Contact Cathie today to discuss which option is best for you and start saving money on your most important investment - your new home.
Cathie Dalziel
416-693-1584 or 416-752-6299
http://mortgagealliance.ca/CathieDalziel
cdalziel@tmacc.com
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Contact the Jeffrey Team for more information - 416-388-1960
