What is Rental Cash Damming?
Rental cash damming is a debt conversion strategy that changes how rental income and expenses move through your accounts.
The basic process is:
- Apply rental income against the primary residence mortgage.
- Reborrow the same amount through a separate component of a readvanceable mortgage.
- Use the borrowed funds to pay eligible rental expenses.
This does not make the total debt disappear. It gradually replaces non-deductible home-mortgage debt with borrowing used for the rental property.
A simple example
Assume a Nova Scotia landlord collects $2,500 per month in rent.
Normally, that money might be used directly for the rental mortgage, property taxes, insurance and repairs.
With rental cash damming, the $2,500 is applied against the primary residence mortgage first. The landlord then borrows $2,500 from a separate rental component to cover the eligible rental expenses.
The personal mortgage decreases while the rental-related borrowing increases.
Where the tax savings come from
The borrowed principal is not deductible. However, the interest may be tax-deductible when the requirements are met, the money is used for eligible rental expenses and the transactions are properly tracked.
That potential deduction may create tax savings the landlord would not otherwise receive.
If those savings are applied as lump-sum payments against the primary residence mortgage, they may help reduce the mortgage years sooner.
What is needed for the setup?
Rental cash damming generally requires:
- An appropriate readvanceable mortgage
- Dedicated accounts
- Clean transaction records
- Consistent bookkeeping
- Guidance from an accountant or qualified tax professional
The rental borrowing should not be mixed with personal spending.
Is it worth considering?
The potential benefit depends on the primary residence mortgage, rental income, eligible expenses, interest rates, tax position and how long the setup is maintained.
My role as the mortgage broker is to arrange the mortgage and borrowing structure. An accountant or qualified tax professional should confirm eligible expenses, potential deductibility, tax treatment and recordkeeping.
This article is for general educational purposes only and is not tax, legal, accounting, financial or investment advice.
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