Refinance / income tax question

[Nastyben]

I will be refinancing a duplex in July. The house will be evaluated between 250k -265k so new mortgage will be 200k – 212k. My mortgage balance is 180k so I’m looking at 20k-32k of cash. I will be paying off a line of credit 15k that I used to renovate the house and leave the rest of money in bank account.

I wanted to know if I will be tax on it or not?? It’s like taking my down payment back

I’m meeting my accountant in 2 weeks. I’m looking for the answer before I ask the question.

Thank you

Ben

 

[Thomas Beyer]

There will be no taxes payable on the cash, but the portion of your new, higher loan that exceeds what you paid plus all improvements is not tax deductible.

You can deduct all actual and reasonable expenses from your rental income, such as utilities, insurance, property manager fees, legal fees, mortgage penalties, minor repairs plus all LOC interest or mortgage interest. Upgrades get usually capitalized, then amortized at 4%/year of the declining balance, like the whole house.

This amortization of your capital cost will further reduce your taxable income to the point where you usually do not pay income taxes on rental income, unless you have a very small mortgage.

For the LOC, ensure it is ONLY used for rental related expenses and not for bling bling, like your last vacation. Then it may be disallowed. Some banks allow multiple LOCs on one house, say your personal residence, so you can separate cost of money for bling-bling from business expenses !

As such, collect evidence of all those expenses and send to accountant once a year (or once a quarter) so they can fill out form T776 that gets attached to your annual tax filing in March or April of every year for the previous year. [of course, you can also do this yourself]. Here is more on this form if you wish: http://www.cra-arc.gc.ca/E/pbg/tf/t776/t776-14e.pdf

 

[andyr]

[quote user="ThomasBeyer"]There will be no taxes payable on the cash unless you take out more than you paid plus all improvements.[/quote]

As far as I am aware there is no tax consequence of refinancing. There is no disposition of the property as you are just borrowing funds and securing against the equity, regardless of the amount borrowed. Do you have any reference for this being taxable if over the cost plus improvements? I searched and did not see anything deeming this as a disposition.

 

[Thomas Beyer]

if you buy a house for $200,000 .. then spend $50,000 improving it .. and a few years later it is worth $400,000 and you borrow 80%, or $320,000 on it that is, to my knowledge, not all tax deductable as the money in excess of your investment, i.e. $250,000 is not invested now, i.e. you can deduct interest on 250,000 but not the rest of $70,000.

SO no taxes on the $70,000 but no right to deduct as an expense unless it is for another investment (say stocks or any other real estate investment, for example .. but not your new yacht)

Note: This is an opinion, not advice as I am not an accountant nor a tax accountant, but that is what makes sense to me and what the intent of "interest deductable on an investment" would mean in practice, to me anyway.

 

[andyr]

I am an accountant, but tax can be complicated and thought maybe you had heard of something I had not.

I think there are two tax issues here.

1) The refinance in your example is not taxable as far as I am aware. Even though you are receiving $70,000 above your cost, this is just a loan and must be repaid. Not proceeds from a sale and therefore not taxable.

2) The interest deductibility on the loan would be dependent on its use. If you re-invested it, it would be deductible, but otherwise, you're right, it would not be deductible.

I was previously just commenting on #1 as your comment seemed to be stating otherwise.