The Cash Damming Strategy Could Help You Pay Less Tax
In this episode, your hosts Daniel Foch and Nick Hill covers cash damming strategy and how it can impact you. If you own a rental property, or are a self-employed worker or an entrepreneur, cash damming could help you pay less tax.
Key Takeaways:
Cash damming involves redirecting personal income to pay off non-deductible personal debts and using borrowed funds to cover business expenses, thereby converting non-deductible debt into tax-deductible debt.
The strategy is particularly beneficial for self-employed workers, sole proprietors, partners in a general partnership, and rental property owners. It requires having significant personal debt, high business expenses, and a substantial taxable income.
Examples of business expenses that can be covered using borrowed funds include mortgage interest, property taxes, management fees, and maintenance costs. This approach allows for making the interest on these debts tax-deductible.
To implement cash damming, one needs to set up a line of credit or another loan facility and have clear financial planning. It's also suggested to consult with qualified tax advisors to ensure compliance and effectiveness of the strategy.
The concept of cash damming is backed by major financial institutions like RBC and National Bank, which have articles and resources available on their websites. The strategy is presented as a well-established method for optimizing tax liabilities for specific financial scenarios.
Real estate investors can use cash damming by utilizing rental income to pay personal non-deductible expenses while financing property expenses with borrowed funds. This can convert non-deductible debt to tax-deductible debt, leading to potential tax savings.
Cash damming requires a long-term investment horizon and robust cash flow management. Ensure your business or rental properties generate sufficient surplus cash flow to cover loan repayments and interest, especially during economic downturns or interest rate increases.
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