Posted by: Diane Alvernaz
You can benefit from a tax advantage by creating a negative cash flow when you finance your investment property.
Consider this recent mortgage application:
the applicants have significant liquid assets and were looking for a small $30,000 mortgage to facilitate the purchase of an investment property. We create negative cash flow by introducing an interest component to the equation, or, as in this case, increasing the interest component. This particular case was complicated by one of the investors wanting to pay cash for their portion, nevertheless, consider the following simplified comparison:
The first column represents the scenario as presented; the investment property has created new taxable income, resulting in additional income tax payable. The second scenario demonstrates tax advantage borrowing; the negative cash flow created would be fully deducted from other income earned in that tax year, resulting in a potential tax refund of $2,000 (at a marginal tax rate of 48%). These investors still have access to the $170,000 difference in down payment to expand their investment property portfolio and multiply their tax advantage.
Both CMHC and lenders have tightened rules around financing an investment property over the past year, but with good credit and good equity, very favourable terms are available. Feel free to contact me direct to review your investment opportunity and capitalize on today’s low mortgage rates!