Investing in real estate can be a profitable venture, but it also comes with its fair share of expenses. One of the major expenses that come with real estate investment is interest paid on financing. The good news is that there are ways to deduct these interests and reduce your overall tax liability. In this article, we will discuss the tax implications of deducting interest on real estate investments in Canada.

What is Deductible Interest?

Deductible interest is the interest that you can deduct from your taxable income, which, in turn, reduces your overall tax liability. In Canada, the Canada Revenue Agency (CRA) allows taxpayers to deduct the interest paid on loans used for income-producing purposes. This means that if you have a mortgage on a rental property, you can deduct the interest paid on that mortgage.

Deductible Interest on Real Estate Investments

If you have a mortgage on a rental property, the interest paid on that mortgage is considered deductible interest. However, if you have a mortgage on a property that is not used for income-generating purposes, the interest paid on that mortgage is not deductible. For example, if you have a mortgage on your primary residence, the interest paid on that mortgage is not deductible.

It is important to note that only the interest portion of the mortgage payment is deductible, not the principal portion. This means that if your monthly mortgage payment is $1,000, and $800 of that payment goes towards interest, you can deduct $800 from your taxable income.

Claiming Deductible Interest

To claim the deductible interest on your real estate investments, you will need to include it on your income tax return. You will need to provide documentation to support the deduction, such as mortgage statements and proof of the property’s income-generating purpose.

It is also important to keep in mind that there are limits to how much deductible interest you can claim. The CRA sets limits on the amount of interest that can be deducted on certain types of loans. For example, the CRA sets a limit on the amount of interest that can be deducted on a loan used to purchase a vehicle.

Conclusion

Deducting interest on real estate investments can help reduce your overall tax liability. However, it is important to keep in mind that only the interest portion of the mortgage payment is deductible, and there are limits to how much deductible interest you can claim. If you have any questions about deductible interest or any other tax-related matters related to real estate investments, it is always a good idea to consult with a professional tax accountant.

At JTT Accounting, we specialize in real estate accounting and can help you navigate the complex tax implications of real estate investments. Contact us today to learn more about how we can help you maximize your real estate investment’s tax benefits.