Tax and Capital Gain confusion on Re-fi to buy more Rentals

[joe123]

I keep getting conflicting data on this... All I want to do is take an existing Rental property that has appreciated to 40% equity, pull out 20% to buy another Rental property... I get conflicting info that I may have to pay tax on that 20%... do I?

 

[Sherilynn]

You don't pay capital gains when you refinance - only when you sell.
All you are doing is pulling out equity. Equity - whether from mortgage paydown or appreciation - is not considered profit.

 

[Thomas Beyer]

Is this held personally ?

If so, there are two issues here to be aware of

A) what is an eligible expense: you can deduct ALL expenses related to your business, incl. interest on loans. The issue is if this loan exceeds the acquisition price many years ago minus accumulated depreciation plus enhancements if not invested.

B) when to pay taxes: on sale usually.

Example: you buy for $200,000 with a mortgage of $160,000 and now asset is worth $300,000. Mortgage has been paid down to $130,000 and you depreciate asset $25,000 (CCA) and you added $10,000 in improvements. Your new mortgage cannot exceed $200,000 + $10,000 - $25,000 = $185,000 to allow all interest to be deductible UNLESS you buy another asset for income purposes, say another rental property. If you buy a boat or a new BMW then they could argue that this loan's interest is not deductible in full. [ But that is rarely enforced by CRA but certainly they could ]

 

[joe123]

thanks. Now if I sell one Rental property, to buy two, or a better yeilding property, do I have to apy any tax...?

 

[Thomas Beyer]

You pay taxes on gains when you sell, regardless of what you buy with the money, unlike the US where you can do a 1031 rollover. This does not exist in Canada.