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Thursday, January 5, 2012

Financing a Property

Several readers have asked how best to finance a property: mortgage or otherwise. Here are some considerations:

Interest on a mortgage is a legitimate expense against rental income but according to the IRS web site, only if the loan (mortgage) is registered against the property. Therefore, if you need to borrow money to finance the property, and this was the only consideration, you would likely choose to go with a mortgage backed by the property.

However, at least when we were looking, we found that interest rates on US mortgages were considerably higher than what we could achieve on a home equity line of credit in Canada. So, yes, a US mortgage would be deductible against US rental income, but even assuming we were making enough "profit" to have to pay US tax (unlikely in the short term), the after tax rate would still be about the same as what we would pay on a home equity line of credit in Canada.

Further, since sellers greatly prefer cash deals to those contingent on financing we could achieve a lower purchase that way. Maybe a couple of percent. Maybe even 5%.

Plus, a US mortgage may require "origination points": an up front fee to cover administration costs.

Overall, we decided that, at least in our case, any required financing was better done through an existing home equity line of credit in Canada. Of course that means that you are borrowing in Canadian currency and need to convert and transfer the funds.

Transferring the funds will cost about 1.25% if you use a currency trading account such as XE.com, or a little more (1% more?) if you just use a bank.

And of course your opinion about whether the Canadian dollar will appreciate or depreciate against the US dollar is another consideration. Changes in the dollar valuation may have the largest effect. I just don't know how to predict it with any degree of accuracy. Currency traders get it wrong half of the time!

A more recent analysis may yield a different result. If you do want to pursue a US mortgage, a previous post provided by a reader provides contact information for Washington Federal and they do currently offer US mortgages to Canadians. Many lenders do not.


  1. Can you not write off the money you borrowed to invest on your Canadian tax return? For example, you borrowed (equity loan) $100,000 for the purposes of an investment (income property in Arizona. Can you not write the interest off now as its a loan for investment purposes?

  2. I believe you are correct. Interest on a Canadian loan (not registered against the US property) cannot be used as an expense for US Tax purposes according to the IRS. However, as long as the Canadian loan is clearly for investment purposes (for example not mixed up with general withdrawals on a line of credit) it should be a valid expense for Canadian tax purposes. That's my opinion, but again, it would be best for readers to check with their own tax accountants.

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    I believe you are appropriate. Interest on a North america of america home loan mortgage (not certified against the US property) cannot be used as a cost for US Tax specifications according to the IRS. However, providing the North america of america home loan mortgage is clearly for affordable economical investment specifications (for example not along with typical withdrawals on a variety of credit) it should be a actual expenditures for North america of america tax specifications. That's my viewpoint, but again, it would be best for guests to assess with their own tax company.

  7. One reason why interest rates in US mortgages are higher is because of the additional fee caused by the valuation administration. This refers to the fee charged by your lender for checking the value of the property, to see if there is a problem with the house construction and if your home is secure to lend on. This is generally done to guarantee that the property is worth the money, and majority of the buyers rely on this valuation survey. This is suitable mainly for those properties that are newly built or in the process of being constructed. It is just a brief assessment, but costs less unlike the full structural survey wherein a comprehensive inspection is done on the property, from the foundation to the roof.

  8. You can't deduct as normal interest on the house but can deduct interest as expense, see http://www.mrmoneymustache.com/2012/04/25/unlocking-your-home-equity-for-profitable-investments/. This is the same as Canada. Any thoughts?

    1. never mind, my account in US says Canadian HELOC can't be deducted for US property since it needs to be secured.