Turn Your Mortgage Into a Tax-Efficient Tool With Rental Cash Damming
If you’re a high-income professional looking to pay off your mortgage faster and reduce your tax bill, one of the smartest strategies available is called rental cash damming. It’s a simple concept, but when structured correctly, it can transform how you pay down non-deductible mortgage debt, lower your taxes, and build long-term wealth, all without sacrificing your lifestyle.
What Is Rental Cash Damming?
Rental cash damming is a strategy that uses rental income to pay down the non-deductible portion of your mortgage and convert it into tax-deductible debt.
In short, you’re:
Using rental income to pay off your non-deductible mortgage faster.
Reborrowing from your re-advanceable line of credit to cover rental expenses.
Converting non-deductible debt into tax-deductible debt over time.
It’s a powerful strategy when structured properly, and it doesn’t only apply to people who own separate rental properties.
Rental Cash Damming With a Basement Suite
One of the most underutilized ways to start rental cash damming is with a basement suite in your own home.
Here's how it works:
You split your mortgage into two components, one for your primary living space (non-deductible), and one for the rental portion (deductible).
You earn monthly rental income from your suite.
That income is directed toward paying down the portion of your mortgage associated with your primary living space.
As you pay down the personal portion, you reborrow that amount through a re-advancing line of credit and use it to pay for the rental portion mortgage
The result? You accelerate your mortgage payoff and begin converting non-deductible debt into a tax-deductible debt, all while generating tax refunds.
Having the proper mortgage structure is key. Without a mortgage that allows for re-advanceable components or proper accounting, the strategy falls apart. So it's essential to work with someone who understands how to set this up correctly, and to consult an Accountant as well.
Purchasing a Standalone Rental Property
Another option can be to purchase a standalone rental property. If you have equity built up in your primary residence, you may be able to access that equity to use for a 20% down payment and closing costs, and create a new mortgage component tied directly to the rental property purchase. Ensure this new mortgage component remains separate from any non-deductible mortgage component.
This new property then produces rental income that can be directed toward paying down any non-deductible mortgage on your primary residence using the rental cash damming strategy, which can accelerate your mortgage payoff and turn your non-deductible mortgage into a growing tax-deductible loan, all while reducing your tax burden.
Stop Paying Off the Wrong Mortgage
Here's the trap many fall into: using extra cash or equity to pay down a rental mortgage.
That sounds smart, but here's the issue, rental mortgage interest is tax-deductible, while your primary residence mortgage is usually not. So when you prioritize paying off your rental, you're missing out on the chance to maximize tax deductions.
Instead, you should:
Keep the rental mortgage amortization extended to minimize the paydown of a tax-deductible debt.
Use surplus cash to pay down your non-deductible mortgage. Or better yet use it as a prepayment towards your primary's mortgage, and reborrow from a re-advancing line of credit to invest in income producing assets to grow your wealth.
This simple shift in strategy can save in taxes and help you become mortgage-free much faster.
Final Thoughts
Whether you’re just starting with a basement suite or considering buying your first rental property, the principles behind rental cash damming can help you pay down debt faster and reduce taxes.
If you're a professional who values advice, planning, and long-term efficiency over short-term rates, this strategy could be exactly what you've been looking for.
Looking to get a mortgage and want to utilize strategies like this? Reach out.
This information is for educational purposes only and does not constitute tax or financial advice. Please consult with a qualified Accountant to ensure this strategy is appropriate for your specific situation.