Cash Damming

Astounding Figures

In referring to the table below, we note that a person who has opted to amortize his residential mortgage of $250,000 (at an average rate of 3%), over a 20-year period, may deduct an imposing figure of $82,200 from his income, over the years.

For example, with a 45% income tax rate, the taxpayer will end up $36,990 richer after taxes! In addition, the cost of using this strategy ranges from very little to absolutely nothing at all! So...

John's Story

John is a self-employed and nonincorporated professional with $125,000 in yearly business expenses (rent, salaries, supplies, etc.) that he has been paying from his gross business income of $300,000. John is also purchasing a new home with a $250,000 mortgage.

With the “cash damming” technique, John will use part of the gross revenues he normally uses for business expenses to make an extra mortgage payment on his personal residence.

Then, his financial institution will allow him to use a line of credit for an amount equal to the extra mortgage payment. So, John can pay his business expenses from his current line of credit.

And since the money borrowed from the line of credit will be for business expenses, John will then deduct the interest on that amount from his income. Thus, he will have converted non-deductible interest (residential mortgage) into deductible interest (line of credit for business).

With annual business expenses of $125,000, John will take just 2 years to completely convert his initial $250,000 mortgage into a line of credit mortgage, at the same time making the interest deductible for the remaining term of the debt.

A Salaried Employee and Income-Producing Property

A salaried employee, just like a self-employed worker, who owns or purchases an income-producing property property, will be able to use a, different form of cash damming so that he, too, can convert non-deductible interest from his residential mortgage into deductible interest.

In fact, in such a situation, that person will then be able to use that part of his rental income that would have normally been spent on paying the operating expenditures of the rental building (taxes, insurance, maintenance, mortgage payments, etc.) to make an additional mortgage payment on his personal residence. And just like Mike in the previous example, once this additional payment is made, this salaried employee will then use mortgage line of credit to pay current expenses on his income-producing property.

And since the amounts loaned against the mortgage line of credit will have been loaned for business purposes, he will have then gradually converted non-deductible interest (from his residential mortgage) into deductible interest (from his line of credit for business purposes).