How A Tax Deductible mortgage Works

A Tax Deductible Mortgage Plan  is a financial strategy  with two components:

The Mortgage Plan converts Regular Debt into a tax deductible Investment Line of Credit (ILOC) that generates Tax Refunds.

The Income Plan uses leverage investment techniques to accelerate financial benefits.

By integrating The Income Plan

  • Your mortgage may be paid off even Sooner;
  • Tax Refunds are potentially Greater; and
  • Your Investment Portfolio Builds Faster!

It’s that simple!  

Case Study

The Mortgage Plan

Steve and Jill Jones are 38 with a marginal tax rate of 39%. They purchased their last home for $500,000 and they required a $300,000 mortgage at Closing.

At age 63, The Mortgage Plan will provide Steve & Jill:

  • $48,000 in Tax Savings
  • Mortgage Paid 2.5 Years Sooner
  • Investment Portfolio of $383,182

Steve and Jill will need to restructure their mortgage payments to achieve these financial results!

The Mortgage Plan Assumptions

  1. Steve and Jill each earn sufficient annual gross income for all interest deductions to save tax at a 39% marginal tax rate.
  2. 3.5% Mortgage and Investment Line Of Credit interest rate.
  3. 8% consistent annual investment growth.
  4. Income Tax was paid at source.
  5. Due to the time it takes to convert Regular Debt to a Tax Deductible Investment Line Of Credit (ILOC), only $123,332 of the $149,339 of interest will be available to tax deduct.  Maximum tax deduction occurs once Regular Debt is fully converted to the Investment Line Of Credit.
  6. The investment portfolio of $383,182 is after the Investment Line Of Credit of $300,000 is fully paid off in year 25, but before final income tax implications.

The Mortgage Plan Disclosures

  1. These calculations and results are for illustrative purposes only. Actual performance will vary and cannot be guaranteed.
  2. The actual investment growth rate, and annual sequence of return rates will alter the results of this strategy.  Lower investment growth rates reduce the effectiveness of this strategy.
  3. Mortgage rates, Investment Line Of Credit rates, and Income Tax rates may vary during the plan and will impact the results of this strategy.
  4. It takes time to convert Regular Debt to Tax Deductible Debt.  You cannot tax deduct interest costs associated with Regular Debt.
  5. The mortgage is deemed “Paid” when the Regular Debt is fully converted to the Investment Line of Credit and the investment portfolio is equal to the initial mortgage balance.

The Income Plan

Steve and Jill are concerned that their Investment Portfolio may not be large enough to guarantee a comfortable retirement. They decide to accelerate their mortgage strategy with The Income Plan.

On advice of their Financial Advisor, they borrowed to invest in a tax efficient Fund which pays monthly distributions of $1,340. These cash distributions are reinvested after paying the interest on the investment loan.

By integrating The Income Plan into The Mortgage Plan, Steve and Jill will accelerate their financial benefits and realize:

  • 25 Year Mortgage Paid in 11 years
  • Investment Portfolio of $1,645,183

Steve and Jill will need need to restructure their mortgage payments to achieve these financial results!

The Income Plan Assumptions

  1. Steve and Jill each earn sufficient annual gross income for all interest deductions to save tax at a 39% marginal tax rate.
  2. 3.5% Mortgage and Investment Line Of Credit interest rate.
  3. 3.75% 2:1 Investment Loan interest rate.
  4. $300,000 beginning mortgage balance.
  5. $100,000 investment line of credit balance is used to secure a 2:1 investment loan, resulting in an increased level of debt to $600,000.
  6. 8% consistent annual investment growth.
  7. 8% Return of Capital (ROC) paid monthly ($2,000/month).
  8. The $2,000/month ROC payments are used to accelerate the conversion of Regular Debt to the Investment Line Of Credit.
  9. Income Tax was paid at source.
  10. 100% of Tax Refunds are re-invested.
  11. Maximum tax deduction occurs once Regular Debt is fully converted to the Investment Line Of Credit.
  12. The mortgage is deemed “Paid” when the Regular Debt is fully converted to the Investment Line Of Credit and the offsetting investment portfolio is equal to the initial combined Mortgage and Investment Line Of Credit balance of $400,000.
  13. The investment portfolio of $1,645,183 is after the Investment Line Of Credit of $300,000 is fully paid off, but before final income tax implications.

The Income Plan Disclosures

  1. These calculations and results are for illustrative purposes only. Actual performance will vary and cannot be guaranteed.
  1. The actual investment growth rate, and annual sequence of return rates will alter the results of this strategy.  Lower investment growth rates reduce the effectiveness of this strategy.
  2. Mortgage rates, Investment Line Of Credit rates, and Income Tax rates may vary during the plan and will impact the results of this strategy.
  1. It takes time to convert Regular Debt to Tax Deductible Debt.  You cannot tax deduct interest costs associated with Regular Debt.
  2. The mortgage is deemed “Paid” when the Regular Debt is fully converted to the Investment Line Of Credit and the offsetting investment portfolio is equal to the initial combined Mortgage and Investment Line Of Credit.
  3. ROC is a tax-free payment of a percentage of the investment principal each year. Each ROC payment drops the Adjusted Cost Basis of the portfolio, which defers income tax obligations until later 
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General Disclosure

The term “Tax Deductible Mortgage” is descriptive of a strategy where a client’s situation is restructured to make mortgage payments tax deductible. The mortgage and/or mortgage interest is not normally deductible, you must structure it to make it deductible.  The “Tax Deductible Mortgage” strategy involves using borrowed money to finance the purchase of securities.  This strategy involves greater risk than a purchase using cash resources only. If you borrow money to purchase securities, your responsibility to repay the loan and pay interest, as required by its terms, remains the same even if the value of the securities purchased declines.  All calculations and results are for illustrative purposes only. Actual results will vary.