Borrowing To Earn Income
The Interest you pay on money you borrow to earn investment income that pays out interests and dividends are deductible in Line 22100 of your Income Tax and Benefit Return. If you are paying interest on money borrowed to generate business income, then you can deduct them as business expenses in Line 8760 of your T2125 .
Interests paid on a mortgage cannot be deducted unless this mortgage is paid on a property that is used for business. Then you will be able to deduct the business use portion only.
Deducting Your Mortgage Interest
Most homeowners use a mortgage to purchase their own home, and the same goes for rental properties. Landlords with a mortgage will find that loan interest is their largest deductible expense. To clarify, you cant deduct the portion of your mortgage payment that goes toward the principal loan amount. Instead the deduction only applies to payments towards interest charges. These components will be listed separately on your monthly statement, and are therefore easy to reference. Simply multiply the monthly amount by 12 to get your annual total interest.
In addition to mortgage interest, you can deduct origination fees and points used to purchase or refinance your rental property, interest on unsecured loans used for improvements and any credit card interest for purchases related to your rental property. Come tax time, you must have already spent money on these purchases to qualify. Since it can be tricky to determine what counts and how to file these extraneous interest charges, consider consulting an accountant or financial advisor to help.
How The Mortgage Interest Deduction Works
The name says it all: The mortgage interest deduction allows you to deduct only the interestnot the principalyou pay on your mortgage.
Lets say your monthly mortgage payment is $1,500. You dont get to deduct $1,500. Look at your mortgage statement and youll see that perhaps $500 of your payment goes toward principal and $1,000 goes toward interest. The $1,000 is the part you can deduct.
The interest you pay decreases slightly each month, with more of your monthly payment going toward principal. So your total mortgage interest for the year isnt going to be $12,000 it might be more like $11,357 or $12,892.
In the later years of your mortgage, that same $1,500 payment may put $1,000 toward your principal and only $500 toward interest. The mortgage interest deduction saves you more in the early years.
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Business Loan Interest Deductions
You must prove that youre legally liable for the loan debt and have proof of repayment to deduct your loan interest. You also need to show that you have a true debtor-creditor relationship with the lender. The money cant come from a friend or family member unless you have a signed promissory note with the necessary details.
The loan funds also must be spent on something for your business, not just kept in a bank account, to be eligible for interest deductions.
There are a few types of interest that arent tax-deductible:
- Interest on loans for overdue taxes or tax penalties unless you are a C-corporation.
- Interest for loans to pay your taxes or fund a retirement plan.
- Interest for $50,000-plus loans borrowed on a life insurance policy for business owners or employees.
In many cases, you can deduct interest on personal loans if the money was used for business purposes.
Salaries Wages And Benefits
You can deduct amounts paid or payable to superintendents, maintenance personnel, and others you employ to take care of your rental property. You cannot deduct the value of your own services.
As the employer, you must deduct your part of the following contributions:
You can also deduct workers’ compensation amounts payable on employees’ remuneration and Provincial Parental Insurance Plan premiums. The PPIP is an income replacement plan for residents of Quebec. For details, contact Revenu Québec.
For more information on making payroll deductions, go to Payroll.
You can also deduct any insurance premiums you pay for an employee for a sickness, an accident, a disability, or an income insurance plan.
For more information on wages, go to Guide T4001, Employers’ Guide Payroll Deductions and Remittances.
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Whats Not Deductible In 2020
Not all mortgage interest is tax-deductible. This is what the IRS says is not tax-deductible:
- Mortgage Debt not secured by collateral.
- Mortgage interest on properties besides the main and secondary home.
- Home equity loans or HELOCs, when you dont use the funds to buy, build or substantially improve the property.
- Any interest on loans over $750,000 .
What Qualifies As Mortgage Interest
There are a few payments you make that may count as mortgage interest. Here are several you may consider deducting:
Interest on the mortgage for your main home: This property can be a house, co-op, apartment, condo, mobile home, boat or similar property. However, the property will not qualify if it doesnt have basic living accommodations, including sleeping, cooking and bathroom facilities. The property must also be listed as collateral for the loan youre deducting interest payments from. You can also use this deduction if you got a mortgage to buy out an exs half of the property in a divorce.
You can still deduct mortgage interest if you receive a non-taxable housing allowance from the military or through a ministry or if you have received assistance under a State Housing Finance Agency Hardest Hit Fund, an Emergency Homeowners Loan Program or other assistance programs. However, you can only deduct the interest you pay. You cannot deduct any interest that another entity pays for you.
Interest on the mortgage for a second home: You can use this tax deduction on a mortgage for a home that is not your primary residence as long as the second home is listed as collateral for that mortgage. If you rent out your second home, there is another caveat. You must live in the home for more than 14 days or more than 10% of the days you rent it out whichever is longer. If you have more than one second home, you can only deduct the interest for one.
Get approved to refinance.
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How To Make An Extra Mortgage Payment For A Tax Deduction
One advantage for a homeowner with a mortgage is that mortgage payments are made for the month prior. In other words, your Jan. 1 mortgage payment actually covers December, meaning there’s a potential tax advantage. Typically, homeowners receive their mortgage payment statements several weeks before those payments are due. By making your Jan. 1 mortgage payment early which is for the previous December you can deduct its mortgage interest portion in the previous tax year.
How To Claim Rental Property Tax Deductions
In general, you should file rental property tax deductions the same year you pay the expenses using a Schedule E form. The process will be much more manageable if you keep detailed records of all income and costs related to the property as they occur. Plus, if youre ever audited, youll have to provide proof for every deduction you claim.
While weve reviewed several rental property tax deductions above, the filing process gets more complicated if you use the rental property as your primary residence at any point in a given tax year. Each years Schedule E form denotes the number of days that you can personally use your home and the percentage of days that the property can be rented out at fair market value before anything changes. In most cases, you wont be able to deduct expenses or losses for personal use on the Schedule E. You may be able to file them using a Schedule A form if you choose to itemize your deductions.
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Get Your 1098 From Your Lender Or Mortgage Servicer
To fill out the information about the interest you paid for the tax year, youll need a 1098 Form from your mortgage lender or mortgage servicer, the entity you make your payments to. This document details how much you paid in mortgage interest and points during the past year. Its the proof youll need for your mortgage interest deduction.
Your lender or mortgage servicer will provide the form for you at the beginning of the year, before your taxes are due. If you dont receive it by mid-February, have questions not covered in our 1098 FAQ or need help reading your form, contact your lender.
Keep in mind, you will only get a 1098 Form if you paid more than $600 in mortgage interest. If you paid less than $600 in mortgage interest, you can still deduct it.
Deduction Of Rental Expenses
What if you rent out a part of your home, such as a room or the basement? You’ll owe tax on your rental income, but you can deduct expenses for the rental space. Potentially deductible expenses include insurance, repair and general maintenance costs, real estate taxes, utilities, supplies, and more. You can also deduct depreciation on the part of your house used for rental purposes, and on any furniture or equipment in the rented space. You don’t have to itemize to deduct the rental-space expenses on Schedule A, either. Instead, you claim them on Schedule E and subtract them from your rental income.
The tricky part is figuring out how much you can deduct if an expense covers the whole house, such as an electric bill or property taxes. In this case, you have to divide the expense and allocate a portion of it to the rental space. You can use any reasonable method for dividing the expense. For example, if you rent a 200-square-foot room in a 2,000-square-foot house, you can simply allocate 10% of any whole-house cost as a rental expense. You don’t have to divide expenses that are only connected to the rented area. For instance, if you paint a room that you rent, your entire cost is a deductible rental expense.
The rules are a bit different if you’re renting out a vacation home or investment property. You’ll still owe tax on the rental income, and you’ll still be able to deduct rental expenses, but there are other methods for calculating those two amounts.
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Can You Claim Mortgage Cancellation Penalty As An Expense When Selling A Rental Property
When selling a rental property you can claim expenses like legal fees, realty fees, etc.
If you had a mortgage and incurred a penalty on the sale because the mortgage was paid early, can you include this expense in the same way? Note that this is might not the same as claiming the interest portion of the mortgage while renters are in the property – I understand where that fits in the annual expenses of the property.
Who Qualifiesfor The Mortgage Interest Deduction
The TaxCuts and Jobs Act of 2017 changed the rules for the mortgage interestdeduction.
Since2017, if you take the standard deduction, you cannot deduct mortgageinterest.
For the 2020tax year, the standarddeduction is $24,800 for married couplesfiling jointly and $12,400 for single people or married people filingseparately.
But if you use itemized deductions instead of claiming the standard deduction, you candeduct the interest you pay each tax year on mortgage debt. This includes any mortgage loan used to buy, build, or improve your home.
You may also be able to deduct interest on a home equity loan or line of credit , as long as the loan was used for one of those three purposes.
How Do You Find The Best Business Loan
A small-business loan is a powerful tool even if you cant deduct loan repayment. To find the best business loan for you, consider the following factors:
- Interest rate: Securing a lower interest rate will save you considerable money over the life of your business loan.
- How much you borrow: Regardless of the reason for your business loan, its important to calculate how much you need to borrow upfront.
- Repayment terms: How long do you want or need to spend paying off your business loan?
Many lenders allow you to prequalify for a business loan with just a soft credit pull, which doesnt have a negative impact on your credit score. Use our business loan calculator to determine the right course of action.
Interest Deduction Fine Print
Your interest deduction is limited to your first $1 million in debt, or $500,000 if you’re married filing separately. If your mortgage is for more than a million dollars, you may still deduct interest on the first million in loans, but not on any amount above that.
Second homes, like vacation property, qualify for the deduction as well but are included under the million dollar cap. If you pay points to reduce your interest rate when you take out a mortgage, you may deduct them all at once for a new home purchase. If you refinance a mortgage, you can still deduct the points but you must do so over the life of the loan.
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How Much Can Small Business Owners Deduct For Business Use
Since you cant claim your mortgage payments, lets figure out how much of your other tax-deductible expenses you expenses you can claim.
First, you need to figure out what percentage of your homes space is used for your business., based on square footage. That percentage will represent how much of your home expenses you can claim. If 8% of your home is used for your business, you can claim 8% of your phone bill, hydro, and so on.
- Lets say your house is 1,000 feet
- Your office takes up 100 square feet
- That means 10% of your home is dedicated to your business
- Which also means 10% of your allowable home expenses can be claimed
- This is the amount you enter on the total business-use-of-home expenses claim on line 9945 of the T1 tax form.
Now keep in mind, you have to be running a small business from your home. These home-based tax deductions are not accessible for people who simply work from home a lot, even though their job is based elsewhere. To claim these expenses, you must work from home more than 50 percent of the time.
Due to Covid-19 there have been updates to the standard rules, please see this article for updates on Employee Home Office expenses for 2020.
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The information in this post is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.
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Tax Deductions On Business Loans Vs Personal Loans
Whether you have a personal or business loan, the loan has two parts: the principal amount and the interest these parts affect your taxes differently. Money used to pay the principal amount is never deductible from taxes, whereas interest payments can be.
Business Loans In most cases, the interest you pay on your business loan is tax deductible. This is true for bank and credit union loans, car loans, credit card debt, lines of credit, and mortgage interest payments tied to your business. For example, say you pay $2,000 each month for your small business loan, and $1,500 goes towards paying down the principal amount, and you pay $500 in interest. While you cannot deduct the $1,500 payments you make on the principal loan amount, you can deduct the $500 a month you pay in interest. The same is valid for interest payments on your business credit card, business line of credit, business car loan, or any loan youre taking out exclusively for a business expense.
Claiming The Mortgage Interest Deduction
You cannot claim a mortgage interest deduction unless you itemize your deductions. This requires you to use Form 1040 to file your taxes, and Schedule A to report your itemized expenses. The interest payments and points you pay are combined with all other deductions you claim on Schedule A the total of which reduces your income that is subject to tax on the second page of your tax return.
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What You Cant Deduct
You cant deduct the interest on a home equity loan or line of credit if you use the money for something other than building, buying or substantially improving your home. A substantial improvement is one that increases your homes value, extends its useful life or adapts your home to new uses. Routine maintenance and repairs dont count.
Likewise, if you do a cash-out refinance, you cant deduct the interest on the cash you take out if you dont use it toward home building, buying or improving.
If you use a home loan to pay off high-interest debt, buy a car, take a vacation or pay tuition bills, you cant claim the deduction on that interest.
You also cant deduct the interest on any portion of your mortgage debt that exceeds $750,000 if you took out your mortgage in 2018 or later.
So, if you have one mortgage for $500,000 on your main residence and another mortgage for $400,000 on your vacation home, you cant deduct the interest on all $900,000 of your mortgage debt just because its from two separate mortgages that are each less than $750,000.
If you have a second home that you rent out all year and never live in, you cant deduct the interest for that homes mortgage. You also cant deduct mortgage interest on more than one second home.