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Interest Expense re Real Estate

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Real Estate -> Interest Expense re Real Estate Purchase
Income Tax Act s. 20(1)(c)

Can I Deduct Interest Expense on Money Borrowed to Purchase Real Estate?

In general, interest expense which is incurred in order to earn income from business or property is tax deductible.  If the interest is paid to a non-resident, it will still be tax deductible (but, see interest expense paid to non-residents).  If you have borrowed funds to purchase real estate from which you will be earning income, the interest expense is deductible, but with restrictions if the real estate is vacant land.

Interest on funds borrowed to purchase vacant land is not deductible, unless the land is earning income such as rental income.  The deductions for both interest expense and property taxes for vacant land cannot exceed the net rental income earned from the land after all other expenses have been deducted.

bullet When the land is earning rental income, the undeducted portion of interest expense and property taxes can be added to the cost (adjusted cost base, or ACB) of the land, which will reduce the capital gain when the land is sold.
bullet When the land is not earning income, the interest expense and property taxes cannot be deducted, nor can they be added to the cost of the land.  See the Vacant Land topic in the Canada Revenue Agency (CRA) publication T4036 Rental Income Guide (link at bottom).

Interest costs related to the construction, renovation or alteration of a rental property are considered "soft costs", for which there are special rules.  For more information on this topic, see the Soft Costs topic in the T4036 Rental Income Guide (link at bottom).

The principal portion of loan payments is not a deductible expense.  When depreciable assets such as buildings or machinery and equipment are purchased, capital cost allowance can be claimed.

Note that there must be a clear paper trail showing that the borrowed funds were directly used to purchase the income-generating property.

See all our articles related to Property Rentals.

CRA Resources

bulletT4036 Rental Income Guide
bulletSoft Costs (costs relating to construction, renovation or alteration
bullet Line 8710 - Interest
bullet Vacant Land
bullet Folio S3-F6-C1:  Interest Deductibility - effective March 6, 2015, replaces IT-533

Tax Tip:  If you purchase vacant land for future use, rent it out in order to enable the interest and property tax costs to be utilized as deductions, or as increases to the adjusted cost base of the land.

 

Revised: June 10, 2015

 

 

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