If you’re someone who owns property and has never heard of the Smith Maneuver, you might already be doing it without realizing! Here’s a brief look into this financially savvy strategy.
The Smith Maneuver, very simply, allows you to take interest from your principal residence and make it tax deductible. Now, there are very specific conditions you have to respect in order to make this work.
First of all, you have to be doing this to create a business, invest in a property, or create some sort of investment income. Let’s say you have a lot of equity left in your property and you want to take out a new mortgage of $200,000 to $300,000. Specifically, you want to purchase another building, to invest in potentially dividend-paying stock, or to pursue a new business idea.
When you do this, you’ll be eligible to write off the interest on your principal residence because you’re taking it out as a loan for this new business venture – it’s viewed as an expense.
If you decide to do this, you’ll have to be very, very careful. We might not be accountants, but we do know that the CRA is very particular. If ever you do get audited, you’ll have to make sure that all of your paperwork and tracking is taken care of properly to avoid any potential issues.
You’re going to have to be able to prove that the money really did go into that investment or into those dividends. If you can’t prove it and instead say, “Well, I took out $250 for this and another $50 for gas in my personal vehicle,” then you’re really running the risk of getting into trouble.
So, please make sure to consult with your accountant first.
What’s really cool about this maneuver is that, generally speaking, we can’t write off any of the interest on our principal residence. This allows you to tap into an equity source that most people have but don’t know how to leverage, and actually claim back that interest as a tax deduction.
Want to know more about this strategy, or other real estate investing hacks? Reach out to our team – we’re always happy to chat.