The Cash Dam is a simple but powerful tax strategy that allows the owner of a rental property (or small business) to convert their non-deductible mortgage on their home to a tax-deductible credit line. I use this technique to help of our real estate investor clients save thousands of dollars in taxes each year.
What is cash damming?
Cash damming is a strategy to convert personal debt (whose interest is not tax deductible) to tax deductible debt (whose interest is deductible). This is done by using a line of credit to pay your rental properties expenses.
If you have a rental property, and mortgage on your primary residence (or any other non-tax deductible debt) you have an opportunity to transfer all of your debt into tax deductible debt over time.
How does cash damming work?
Once these prerequisite accounts and line of credit are in place, you simply need to do the following to benefit from the tax savings generated by cash damming:
- Use your gross business income to pay your expenses and personal debts, such as your mortgage
- Pay 100% of your rental expenses with a loan or line of credit designed for this purpose
The main benefit is tax savings. Specifically, this strategy allows you to:
- Pay down your personal debt faster using your rental income and avoid paying non-deductible interest
- Deduct interest paid on your loan to finance rental expenses, including mortgage payments, property taxes, insurance, condo fees, and maintenance.
Cash damming may seem simple, but it’s still important to make sure you understand how it works, the different steps, and maintain records for your audit trail.
Keep in mind that patience is key, as your personal net debt will not change overnight, but over time you will be increasing the amount of tax-deductible interest by each year and lowering your taxes year after year.
Let me know when I can help.