Let’s dream a little (like an accountant). A mortgage of $ 300,000 at 2.5%, amortized over 20 years, costs over $ 7,000 in interest just over the next year, and over $ 80,000 over the full term of the loan, if the rates do not. don’t move.
If you could deduct that from your income, what would you save in taxes! With a marginal tax rate of 37.12%, you reduce your tax bill by more than $ 2,500 in the first year.
No, we cannot deduct the interest on the mortgage on our house from our personal income. But there is a way to make them deductible, with a little patience and provided that certain conditions are met.
THE MONEY SETTING
This is possible thanks to the “setting aside of the money”. The concept holds no secrets for tax professionals. Long proven, its application nevertheless requires a minimum of rigor.
The process is based on the tax principle according to which an expenditure made for the purpose of generating income can be deducted from the latter. Interest on a loan taken out to earn money is one of these deductible expenses.
You will understand, you have to do business, without it necessarily being big business, to achieve the sleight of hand. Real estate investors use this technique frequently. It is also within the reach of self-employed workers and entrepreneurs who are not incorporated.
TRANSFER YOUR PERSONAL DEBTS
Like everything related to finance, we find ourselves here in the presence of a system of communicating vessels, there is no magic.
The operation consists of accelerating the repayment of the mortgage and other personal debts using the cash flows produced by income properties or self-employed activities. Business expenses – everything you have to pay to generate your income – are then funded using a line of credit.
The mortgage, whose interest rates are not deductible, reduces quickly. On the other hand, the line of credit balance swells, but its interest can be deducted from income. After some years. All that’s left is deductible interest.
A DELICATE OPERATION
It doesn’t sound too complicated, but the slightest mistake can screw things up. So you need a structure. Basically, on the one hand, we set up an account to receive the income generated by professional activities. On the other hand, we open a separate account attached to a line of credit.
The first will be used to pay off the mortgage and personal debts. The second will cover business expenses, drawing on the line of credit. This can only be used for operating expenses, otherwise it will be contaminated and interest on the line of credit can no longer be deducted.
To consider this strategy, it is therefore necessary:
- A mortgage on which you can make large prepayments
- A small business that requires high enough operating expenses.
- A professional to keep us from making a mistake.
The tax savings will be substantial!