Using old house for security

QUESTION: I currently own a home which I bought in 2002 for 132K$ and I still have 92K$ mortgage on it. The present value of the home is about 225K$. Recently I have set up a home equity line of credit on the home(HELOC). I am buying a new home for about 400K$. I am drawing 75K$ from HELOC and have another 15K$ savings for down payment for new home. I want to retain the curent home for rental income.
1. Am I better off keeping the home as rental income or sell off the home and use all the capital gains for down payment for new home.
2. If I retain the current home for rental income, can I deduct the interest on the mortgage and interest on HELOC as expenses from the rental income?
3.If I retain the home for rental income, Am I better of in remortgaging the current home to draw out maximum cash for down payment of new home or leave it as is with HELOC.
4. If after 3-4 years I decide to sell the rental property, what will be the tax I will be paying on the sale proceeds? The current home is owned by me and my wife and the new home will also be jointly owned. --------------------------------------------------------------------------
david ingram replies:

1.    If property values do not increase in teh next four years you would be better off selling if you intend to sell in four years as in question 4.  If property values double in the next four years as they did in many areas in the last four, you are better off keeping it in general.   The answer is somewhere in between if 4 years is the criteria.  If keeping it for 10 years or more is the criteria, you are likely better off keeping it no matter where it is.  However, i am one of the people that finds it hard to see the values in Vancouver, Calgary and Edmonton continuing as before for the next four years.

2.   The interest on the existing 92K mortgage is deductible but not the money borrowed to buy the new house becaue it was not borrowed for investment purposes.  However, if you were to buy your wife's interest in the house and use borrowed money to do so, the interest would be deductible.

3.   It is irrelevant.  Either way the interest is not deductible.  One of you should borrow the money to buy the other one out as in 2 above.

4.    No idea, unless yo tell me what it will sell for.  The tax will be levied at standard rates on 50% of the profit.

Goto and read the November 2001 newsletter in the top left hand box to get some more ideas about making interest deductible.  Then read the capital gains Seciton of the TAX Guide (same box) for an idea of how capital gains tax works. �