What is Cash Damming?

Cash damming is a financial strategy that transforms personal debt, which typically does not benefit from tax-deductible interest, into business debt, where the interest paid is tax-deductible. This involves employing a line of credit to cover business-related expenditures.

Eligibility for Cash Damming

Cash damming isn't universally accessible; it requires meeting specific criteria. Eligible individuals include:

• Owners of rental properties
• Self-employed individuals without incorporation
• Sole proprietors
• General partnership members

Note: For general partnership members, there are additional conditions to consider. Consulting with an advisor or a tax professional is advisable for detailed insights.

Implementing Cash Damming

To leverage cash damming effectively, a well-defined plan is essential. Eligibility hinges on:

• Having considerable personal debt, like mortgages or car loans
• Incurring high business expenses
• Earning substantial taxable income

Essential financial tools include:

• A dedicated bank account for business revenue
• A separate account for business expenditures
• A line of credit exclusively for business costs

A high credit score is crucial for securing such loans. Maintaining a pristine credit history is beneficial, as personal financial health often influences professional fiscal opportunities.

Procedure for Cash Damming:

1. Allocate gross business income to settle personal and business debts.
2. Use the designated loan to cover all business expenses.

Benefits of Cash Damming

The primary advantage of cash damming is tax savings, achieved by:

• Accelerating personal debt repayment with business income, thereby reducing non-deductible interest
• Claiming deductions for interest on loans used for business expenses

To maximize benefits, review your mortgage's repayment conditions and ascertain which business expenses qualify for interest deductions. Consultation with a tax expert is recommended for clarity.

Considerations and Planning

While conceptually straightforward, understanding the nuances of cash damming is vital. For instance, changes in personal circumstances, such as a separation, could affect asset division. Professional advice from financial and tax experts is crucial to navigate potential complexities.

Patience is key; immediate net debt reduction is unlikely. Financial planners often suggest a three to five-year timeframe for this strategy. Discipline in financial management is essential, especially for self-employed individuals, to harness the tax-saving potential of cash damming. Regular consultations with your advisor can ensure the strategy's effectiveness and compliance.