Tax Deduction for Borrowing

[Morphius909]

Hey Folks,

Is the interest you pay on a HELOC (the HELOC is used for a real estate investment ) tax deductible?

[kaycee8877]

if interest is paid on a loan used to earn income then yes

[gedwards]

To achieve traceability of funds the HELOC should be used solely for the real estate investment. If you are asking about using a HELOC that you currently have and will continue to use for both the investment and personal uses the water because muddy when you attempt split the interest between the investment and personal use.

[Morphius909]

The land will be held on until sucht ime that it is either
1) Developed, subzoned, etc and then sold or
2) sold for a profit as is

For the time being, we will be paying interest on a HELOC until such time (#1/2) develops or we are able to pay off the loan entirely.

[gedwards]

Ahhh you didn't mention if your first post that the real estate investment was for vacant land. Unfortunately that tid bit of information changes everything.

Let me tell you my assumptions from you last email: you are buying vacant land that will basically remain unused until it is either developed or sold as it. Based on that I assume the whole purpose of buying this land it to flip it (in one form or another) and make a profit. Are those assumptions correct?

Given this information my answer regarding the deductibility of interest is no. Interest is not deductible for vacant land (neither is property tax by the way). If you rent out the land you can deduct interest up to the total of the rental income (ie the interest can not create a loss). Typically however you can add the cost of interest & property tax to the adjusted cost base of the land. This basically means that it would reduce the amount of capital gains tax you would pay if you sell the land for more than you pay for it.

However there is a strong likelihood that you will need to pay tax on 100% of the profit you make from selling the land (and not only 50% as in the case of a capital gain). Capital gains exist when you sell capital assets that have been purchased for the purpose of producing income and you then sell the asset at a later date for more than you paid. However if you buy something with the sole intention of flipping it for a profit (as it appears in your case) then the land will now be considered inventory and the profit will therefore be considered business income NOT capital gains and thus 100% taxable.

[Morphius909]

I love tax laws! LOL

Thanks for all the info!

[sunnybono]

if interest is paid on a loan used to earn income then yes

Folkes don't get confused btw income & profit. I can borrow $100,000 @7% and earn only $2000 income and then report a loss every year to CRA.

Inorder to have any intereste deduction, there has to be an expectation of profit from the investment!!!!

sk

[gedwards]

Tax laws are easy. Simply assess any situation based on what makes logical common sense. Then assume the opposite is how it really works.