Real Estate -> Interest expense re
real estate
Income Tax Act s. 20(1)(c)
Can I write off 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.
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 CRA publication T4036 Rental Income
Guide.
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.
See also: Is rental income property or business income?
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: October 21, 2009
