I've come to realize that my mother will be paying more in taxes this year as she is renting out her house. She moved into a retirement home, and, with it being vacant, I rented the house out. The rent money we get is helping pay for her retirement home, but I did not take into account paying tax on the additional income. What I've been told is most people who rent a house have a mortgage against the house so that they can claim a deduction for the interest.
What are your thoughts if we took money against her line of credit and set it up to pay interest only then invest that money?
Yes, most investment properties have a mortgage on them so the interest can be deducted.
Any debt interest charged on money used for investment purposes can also be deducted as an expense. So, in short, yes, if you borrow from the line of credit (LOC) and invest the funds the interest can be deducted. Just be sure that the investment return is greater than the interest percentage being charged to the LOC. Otherwise, it just doesn't make sense to invest to effectively lose money.
As your mother's home is a rental property, there are other expenses that you may use to offset the rental income to reduce her tax bill, such as property tax, hydro, utilities, cable, internet, lawn maintenance, snow removal and appliance service. This wouldn't be the case if the renter is paying some or all of these costs themselves.
Having the interest deduction to offset the extra tax caused by the rental income is not a strong enough reason in my opinion to do it. They are actually two independent tax strategies but may fit into an overall strategy.
Nancy Woods is an associate portfolio manager and investment adviser with RBC Dominion Securities Inc. Visit her website www.nancywoods.com or send an email request to firstname.lastname@example.org. You can also send your questions to email@example.com.