Is Mortgage tax deductible?

[DanielCarrera]

Hello,

I just read in this forum that "if it's my primary residence" the mortgage interest is not tax deductible. Could someone confirm this? Is there a way to make my house not my "primary residence" and make the mortgage tax deductible? for example, could I say I live with my parents and I'm renting the home to someone who just happens to be my wife and I just happen to stay there overnight every night? :-)

Thanks for the help.

[ynot]

The mortgage interest on a primary residence is not tax deductible, but there are some ways to make it so. One is as you stated and move out of the house and rent it to someone else. You can also rent a portion of the house, if you have a legal apartment, and claim a portion of the mortgage interest. There is also something called the Smith Maneuvre, which you can find out about by searching the forums, I don't endorse it.

Edit: Just noticed the comment about your wife renting the house, no, that doesn't qualify.

[Thalo]

If it's your primary residence, not tax deductible (unless you do the Smith manoevre, which would require you to have a substantial amount of investments to begin with) but there is also no capital gain upon sale of the residence. If it is an investment/rental property and you buy the house with a mortgage then interest is tax deductible but then you have to pay capital gains upon sale.

[MasterAvatar]

Hello,

for example, could I say I live with my parents and I'm renting the home to someone who just happens to be my wife and I just happen to stay there overnight every night? :-)



If that's the case, will you also be including rental income (from that person who just happens to be your wife) on your tax return as well?

[mexicanbandit]

Hello,

I just read in this forum that "if it's my primary residence" the mortgage interest is not tax deductible. Could someone confirm this? Is there a way to make my house not my "primary residence" and make the mortgage tax deductible? for example, could I say I live with my parents and I'm renting the home to someone who just happens to be my wife and I just happen to stay there overnight every night? :-)

Thanks for the help.

The mortgage interest on your primary residence MAY be tax deductable.

The determination of whether the interest is tax-deductable depends upon what the funds which have been loaned to you have been used for. If the funds have been used for non-investment purposes then it is not tax-deductable. Most people's mortgage fall into this category as the funds have been used to pay for the personal-use residence and not in an investment which is going to generate income.

If you have a fully paid-for primary residence, and you take out a mortgage, and used the proceeds of the mortgage to buy investments, then the mortgage on the primary residence is tax deductable.

[grant]

(unless you do the Smith manoevre, which would require you to have a substantial amount of investments to begin with)
There are other ways to do the smith maneuvre than to have investments.

Talk to a planner familiar with smith maneuvre, they can lay out some options for you.

[DanielCarrera]

If it's your primary residence, not tax deductible (unless you do the Smith manoevre, which would require you to have a substantial amount of investments to begin with) but there is also no capital gain upon sale of the residence. If it is an investment/rental property and you buy the house with a mortgage then interest is tax deductible but then you have to pay capital gains upon sale.

Thanks. I looked up "smith manoeuvre" on this forum and I think I get it. It's interesting... I will need to learn a lot about HELOCs before trying something like it. For example:

- Does a HELOC have the same rate as a mortgage?
- Can I just take out more money on a HELOC whenever I want?
- What happens when I move to a new house?

I don't think I would do a full Smith Manoeuvre, I *do* want to pay the mortgage. But I can think of a variation I could use: Say I've saved $5000 that I want to invest in mutual funds. Put those $5000 on the mortgage and borrow the $5000 from the HELOC and then invest it. Otherwise, just keep making my regular mortgage payments as usual. The end result is that I pay the mortgage on-time but still get some tax deduction. In fact, I pay it faster because I'm also making the minimum payment for the HELOC.

I just did a scenario with a 25-year mortgage and assuming I'd invest $5000/quarter. Using my variation the mortgage was paid 4 years earlier and the invested money was over twice as large.

Hhmm... all very interesting. I'll have to research this. Thanks a lot for the tip!

[grant]

- Does a HELOC have the same rate as a mortgage?
- Can I just take out more money on a HELOC whenever I want?
- What happens when I move to a new house?

1) typical HELOC has interest rate = prime, typical variable rate mortgage has interest rate = prime - 0.75% -> 1.1% ... soo.... HELOC is usually about 0.75 -> 1.1% more expensive
2) Yes, that is the "line of credit" part of heLOC.. and that's why it's more expensive
3) your new home must qualify to be collatoral for the HELOC if you want to transfer it... otherwise, you pay it off from proceeds of home sale.

But I can think of a variation I could use: Say I've saved $5000 that I want to invest in mutual funds. Put those $5000 on the mortgage and borrow the $5000 from the HELOC and then invest it. Otherwise, just keep making my regular mortgage payments as usual.
that is 1 valid way to execute the smith maneuvre and a wise thing to do.

[DanielCarrera]

I just did a scenario with a 25-year mortgage and assuming I'd invest $5000/quarter. Using my variation the mortgage was paid 4 years earlier and the invested money was over twice as large.

Hhm. I took a closer look and I made some mistakes on my spreadsheet. The real difference is actually quite small. Only about 11% better off :-(

I'm not sure what the problem is. I guess that one problem is that, since I can only save about $5000 per quarter, it takes a few years before I can transfer the mortgage to the tax-deductible HELOC - and the first few years are important for compounding.

I'll need to think about this some more.