The debt that costs you most is the one you can't deduct
Most landlords carry two kinds of debt: the mortgage on their home and the mortgage on their rental. They feel the same every month, but they aren't. The rental's interest is a tax deduction. The home's interest isn't, so every dollar of it is paid with money you've already been taxed on.
That means the home mortgage is usually the more expensive debt, even at the same rate. Yet it's often the one that lingers longest, while the rental gets paid down by the tenant. Rental Cash Damming flips that around.
Why your home mortgage costs more than it looks
Say you're in a 40% tax bracket. A dollar of rental interest really costs you about 60 cents after the deduction. A dollar of home mortgage interest costs you a full dollar, paid from income you've already been taxed on. The rate on the statement can be identical, but what you actually pay is not.
So the question isn't just how fast you pay off debt. It's which debt you pay off first.
The rule it's built on
In Canada, interest is generally deductible when the borrowed money is used to earn income from a business or property. What counts is what the borrowed dollars were directly used for, not the bigger picture behind them. The rule sits in section 20(1)(c) of the Income Tax Act. Two Supreme Court of Canada cases, Bronfman Trust (1987) and Singleton (2001), are the ones usually cited for looking at how borrowed money was directly used, and CRA sets out how it applies the rule in Income Tax Folio S3-F6-C1, Interest Deductibility.
Rental Cash Damming uses that rule as it was written. The rental's bills are paid with money borrowed from a line of credit used only for the rental. Since every borrowed dollar went to a rental expense, the line's interest is a rental expense too.
What changes, and what doesn't
Your monthly payments stay the same. Your total debt comes down at about the same pace as before. The rent still comes in and the bills still get paid.
What changes is which balance shrinks. The rent goes onto your home mortgage, so it falls faster than it ever would on its own. Meanwhile the rental line grows by what the rental's bills and the line's own interest cost, and that interest comes back to you at tax time. Over the years, a mortgage you couldn't deduct turns into debt you can.
Why the order of the money matters
If you pay the rental's bills from the rent and then put whatever's left on your mortgage, nothing has changed for tax purposes. The strategy only works when the rent goes to the home mortgage first and the rental's costs are paid with borrowed money.
That's why the set-up matters more than the idea. Separate accounts, a line used only for the rental and a clean paper trail are what let you, and your accountant, show exactly where every dollar went.
How it fits with other strategies
Rental Cash Damming pairs well with portfolio scaling: as your home mortgage shrinks, the equity it frees up can become the down payment on your next property. Once the home mortgage is fully converted, some people go on to the Smith Manoeuvre with the equity that's left.