Refinancing a rental property

Q – I have a rental unit that has some equity into it. If I were to take the equity out, effectively refinancing for a higher mortgage, would the interest paid on the new (higher now) mortgage amount be entirely deductible? Could I use the money withdrawn for any purpose or would there be constraints on it?
– K.G.

A – With your own home, the interest on a mortgage loan only becomes tax deductible if the money is used for investment purposes. If it is used for anything else, such as financing the house, remodelling, repairs, etc., there is no deductibility.

However, you asked about a rental property so this creates a different situation. You are allowed to claim a deduction for any interest charged on money you borrow to buy or improve a rental property. However, if you refinance the property and increase the amount of the loan, the issue of deductibility turns on how the extra money is used. If it is employed for business or investing purposes, the interest is deductible. If it is used for personal purposes, it is not. See the Rental Income guide published by Canada Customs and Revenue for more details.

&t;>If part of the money is to be used for investing and part for some other purpose, it would be preferable to use separate sources of financing to ensure there will be no future problem with the CCRA. For example, you might use a conventional mortgage for financing the property and a line of credit against your equity for money taken for personal use. The interest paid on the line of credit would not be deductible in this case. – G.P.