investment property interest relief with decreasing mortgage

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moneymakeover

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What is a good way to avoid tax in retirement on investment property? What do investors generally do with their investment properties in retirement?

As the mortgage decreases the tax liability increases.

But keeping the mortgage, while good for the tax bill, creates some uncertainty in retirement.

I did some figures where the capital is reducing annually by 2%
And the rent is increasing annually by 2%
Over 25 years


So the situation starts
rent: €28,000
debt: €600,000
interest: €30,000
tax liability: -€2,000
Interest at 5% say €30,000 meaning year1 no tax liability (negative liability of €2,000)
Based on 100% mortgage interest relief as this was announced in Budget 2016 (to be phased in over 5 years).

rent debt interest liability
€28,000 €600,000 €30,000 -€2,000
€28,560 €588,000 €29,400 -€840
€29,131 €576,240 €28,812 €319
€29,714 €564,715 €28,236 €1,478
€30,308 €553,421 €27,671 €2,637
€30,914 €542,352 €27,118 €3,797
€31,533 €531,505 €26,575 €4,957
€32,163 €520,875 €26,044 €6,119
€32,806 €510,458 €25,523 €7,284
€33,463 €500,249 €25,012 €8,450
€34,132 €490,244 €24,512 €9,620
€34,814 €480,439 €24,022 €10,793
€35,511 €470,830 €23,542 €11,969
€36,221 €461,413 €23,071 €13,150
€36,945 €452,185 €22,609 €14,336
€37,684 €443,141 €22,157 €15,527
€38,438 €434,279 €21,714 €16,724
€39,207 €425,593 €21,280 €17,927
€39,991 €417,081 €20,854 €19,137
€40,791 €408,740 €20,437 €20,354
€41,607 €400,565 €20,028 €21,578
€42,439 €392,553 €19,628 €22,811
€43,287 €384,702 €19,235 €24,052
€44,153 €377,008 €18,850 €25,303
€45,036 €369,468 €18,473 €26,563

In year 25 the situation is
rent: €45,036
debt: €369,468
interest: €18,473
tax liability: €26,563

If the debt was eliminated entirely the liability on a rent of €45,036 could become painful

In retirement would the absence of PAYE income make the above more palatable? Maybe with a lower band tax rate say 20%?

Is a debt of €369,468 manageable in retirement?
 
I would have thought that the plan would be to have no debt in retirement and the rent would be your pension.

The idea of having interest to reduce a tax liability is misinformed.

How do you propose to repay a mortgage and pay income tax with limited income in retirement .
 
Agree with Joe

You are not thinking clearly about this at all. You might be trying to do some clever engineering.

You need to think about every investment on an annual basis. And review the decision all the time.

Your long term plan should be to reduce risk and, as Joe points out, being free of expensive debt would be an important part of that.

If you are paying interest at 5%, you need to ask whether you should have this investment at all.

You need to look at your overall finances. For example, if you have a home loan at 4.5%, then you would pay this off before the commercial mortgage at 5%.

But if you have spare cash lying around, you should pay down that mortgage as you are getting a risk-free, tax-free,return of 2.5% by doing so.

Also, by reducing the amount of your mortgage, you may be able to switch it to another lender at a lower rate.

Brendan
 
So Brendan the ideal situation leads to having to pay income tax on the full rental income?
 
Good point Joe90

I suppose I was taking the view of minimizing the tax

So if the ideal is zero interest liability the tax just has to be accepted as a fact of life?

Do pensioners get any tax credits?
 
PRSI (4%) ceases to be relevant once one hits 66, and once a couple hit 65, they can earn up to €36k pa tax-free. Two State Pensions and an apartment rental would typically add up to around that.

As others have pointed out, spending €100 to save €50 is bonkers, and that's essentially what "hoping" to have a tax deduction means.
 
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