Investing in real estate can be a lucrative venture, but it can also come with significant financial commitments. Borrowing money to purchase an investment property is common among investors, but it is essential to know how to deduct the interest on the borrowed money to minimize your tax liability. In this blog post, we’ll cover everything you need to know about how to deduct interest on money borrowed for investment properties in Ontario.
What Is Tax-Deductible Interest?
Interest is a fee charged by a lender for the use of borrowed money. Tax-deductible interest is the interest paid on loans used to earn income. In Ontario, interest paid on loans used to earn rental income from investment properties is tax-deductible. This means that the interest paid on money borrowed for investment properties can be deducted from your taxable income.
How To Deduct Interest On Money Borrowed For Investment Properties
To deduct interest on money borrowed for investment properties, you need to follow a few steps:
- Determine Eligible Interest – Only interest paid on loans used to earn rental income is tax-deductible. Any interest paid on loans used for personal expenses, such as a personal vehicle, is not tax-deductible.
- Keep Accurate Records – Keep accurate records of all interest payments made on loans used for investment properties. Ensure that you keep track of the loan balance, interest rate, and payment schedule.
- Complete Schedule 4 – Complete Schedule 4 when filing your income tax return. This form is used to calculate the amount of deductible interest.
- Claim The Deduction – Claim the interest deduction on line 221 of your income tax return.
Tips To Maximize Your Interest Deduction
To maximize your interest deduction, consider the following tips:
- Use A Separate Account – Use a separate bank account to pay for expenses related to your investment property. This will help you keep track of your expenses and simplify record-keeping.
- Consider Refinancing – Refinancing your investment property to lower your interest rate may help you maximize your interest deduction.
- Work With A Professional – Working with a tax professional who understands the tax laws in Ontario can help you maximize your interest deduction and minimize your tax liability.
Conclusion
Deducting interest on money borrowed for investment properties is a great way to reduce your tax liability. However, it is essential to follow the rules and keep accurate records to ensure that you qualify for the deduction. Remember to keep track of all interest payments, complete Schedule 4 when filing your income tax return, and claim the deduction on line 221. By following these steps, you can maximize your interest deduction and minimize your tax liability.