Two properties: What's the best tax position?

D

Dinarius

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We are about to buy a semi-d and let the apartment that we have been living in for the last 10 years.

The apartment is worth about €330k. Our mortgage on it is exactly €100k.

To buy the semi-d we will have to take another mortgage of about €200k.

So, our total borrowings will be about €300k.

We will let the apartment for about €850 per month, netting about €10k per annum on which we will have to pay tax at the top rate.

We could borrow up to 92% of the value of the apartment, a total of about €300k. This would mean that all our borrowings would be against the apartment and the house would be mortgage free. We have been advised that this is the best course of action from a tax point of view. i.e. Maximize the borrowings on the apartment in order to minimise the tax bill, since mortgage interest relief is now so poor that there is little point in borrowing against the house.

The downside of this is that we would be above the 60% level allowable for a tracker rate, so we would be paying the current variable of around 1.25% instead of a guaranteed 1% over ECB prime for the duration of the mortgage. So, we trade off a better lending rate for a smaller tax bill. Or, so the theory goes..............!

Does this course of action make sense? Anyone got a better suggestion? I would be grateful for any advice.

Many thanks.

D.
 
My gut feeling would be to max out borrowing on your rental property, as any interest is offset against your rental income at the top rate.

Interest on your PPR is only allowable at the standard rate, and subject to certain limits.

BTW - NIB (ECB+.79%) / Ulster (ECB+.85%) offer the best tracker rates and also may cover your legal costs. Talk nicely to your broker and you might even get a share of his commission!
 
You can only offset the interest on monies use to "buy, improve or renovate" the investment property against the rental income so only the interest on the current €100,000 could be offset.

Sarah

www.rea.ie
 
Sarah W said:
You can only offset the interest on monies use to "buy, improve or renovate" the investment property against the rental income so only the interest on the current €100,000 could be offset.
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Hhhhhmmmmmmm...............

Sarah,

That makes it a trickier decision. If I am not allowed to benefit from the additional €200k on the apartment, then I might as well have it on the house, even if it is only allowable at the standard rate. Correct?



Lemurz,

Yes, I am aware of those tracker rates, but as I wrote above, if I put everything on the apartment, I won't be eligible for them.

Any other suggestions welcome!

Many thanks.

D.
 
Just spoke to my accountant again and to another financial consultant.

They are both adamant that deductions can be made on the interest on the entire €300k and not simply on the €100k outstanding on the apartment at the moment, if we borrow the lot against the apartment.

Makes that route the only way to go, in my view, since mortgage interest relief is going only one way in the future and that's down.

Best to reduce the tax bill on the rental income from the apartment as much as possible.

D.
 
I looked into doing this when selling my old house and sought to maximise lending against the "old" house which I was intending to rent out. In the heal of the reel, the advice other posters are giving here was what I found to be the case and would definitely worry about your accountant's/consultant's advice.

I didn't go ahead because I believe it's only a matter of time (i.e. the next time the government get stuck for dough) before the revenue start looking more closely at this and before you know where you are you are talking telephone numbers in penalties and interest.

Rebecca
 
MissRibena said:
I didn't go ahead because I believe it's only a matter of time (i.e. the next time the government get stuck for dough) before the revenue start looking more closely at this and before you know where you are you are talking telephone numbers in penalties and interest
Click to expand...

Rebecca,

I am not sure what you mean by this.

Mortgage interest relief is only going to fall in the future or, at best, stay the same. So, it would seem that placing the maximum debt, where one would otherwise be liable for the most tax, is the logical course

No?

Thanks.

D.
 
Ok maybe I haven't followed what you're intending to do.

What I understood is that you are going to organise a mortgage on your current appartment to cover the balance of the appartment and the buying of the new house. Then use the interest on this mortgage (effectively covering both properties) as a deductable expense against the rental income from the appartment/original property in order to minimise the tax you pay on this rental income.

I was told that this is not correct as you are only entitled to deduct interest from a mortgage/loan used to buy or repair/improve the property you are renting out. The proportion of interest that relates to the new property (in which you intend to live) is not allowable against the rental income and this is something that could/will come back to haunt you at a later date. You would have to investigate how/if you could claim some tax relief on the PPR interest in the normal manner but this tax relief would not be as much as the more desireable (but incorrect) route of offsetting against the rental income.

IMHO it would be naive to think that you could hide/ignore this forever, if the revenue's ways of dealing with other tax avoidance issues are anything to go by.

Rebecca
 
Dinarius said:
Just spoke to my accountant again and to another financial consultant.

They are both adamant that deductions can be made on the interest on the entire €300k and not simply on the €100k outstanding on the apartment at the moment, if we borrow the lot against the apartment.

Makes that route the only way to go, in my view, since mortgage interest relief is going only one way in the future and that's down.

Best to reduce the tax bill on the rental income from the apartment as much as possible.

D.
Click to expand...

They are 100% incorrect - it's worrying that your accountant is totally ignorant of what is pretty basic information.
 
Hi Dinarius,

I was in a similar position to you and approached my accountant regarding the tax position if I increased the mortgage on what was my PPR and converted it to a rental property. His advice was along the lines of Rebeccas i.e. that only the 100k would be allowable for interest relief. He also told me that he was aware that a lot of people were assuming they could just write off the extra mortgage interest. His advice (which I took) was to sell my PPR, buy an investment property and mortgage it to the hilt - then there is no amibiguity about the tax position, as Rebecca said given the efficiency of our tax authorities it will probably take then 10+ years to get round to checking this stuff out and you might end up owing so much that you'll be end up handing them the keys to the house..:(

M
 
I spoke to my accountant again today.

He said that, while strictly speaking, putting the additional €200k on the apartment instead of the house does not make it eligible for deductions, the reasoning runs something like this:

You are buying a new house, but you want to keep the old one. This necessitates borrowing €200k that you wouldn't otherwise have to do. So, you borrow the money, but do so against the old house and not the new one.

The key to this is that you do so AT THE TIME OF PURCHASE OF THE NEW PROPERTY. In other words, that €200k is demonstrably for the purchase of the new house and not for anything else.

The underlying logic here is that you can argue, "OK, if you insist that I can't avail of deductions on this €200k if it's set against the old house instead of the new one (where it patently would be eligible) I'll switch it to the new one." Clearly, this wouldn't wash if you decided to borrow against the apartment some time after purchasing the new house.

1. Obviously, this is an interpretation of the existing legislation. My advisers say that they have never had a problem playing it this way. You ARE entitled to deductions on the €200k. You are simply availing of them against one property rather than the other.

2. The difference in benefit is very small and depends on a few factors. a. What you are getting in rental income on the apartment. b. What rate you pay if you borrow the entire €300k against the apartment or, c. What rate applies if you borrow €100k on one and €200k on the other. e.g. Would getting tracker rates on two smaller loans be more beneficial than paying a higher rate on €300k? etc...etc...

We still haven't decided which way to play it. The real benefit comes if mortgage interest relief is reduced over time. Against that, having N.I.B's 2.79% tracker on both properties is VERY tempting.

D.
 
You are codding yourself from a tax perspective. What might seem like a small difference will snowball when the revenue start digging.

If it was that easy, we'd all be at it so don't say you weren't warned.

Rebecca
 
Thanks for the advice. Not sure if you understood my last post. I have no intention of breaking the law. It's a question of interpretation.

On a €300k outlay, the difference between splitting the loans and loading the apartment is about €1000-1500 per annum, at best. This assumes a good rent on the apartment and maximising the occupancy.

Against this, as I wrote above, is the temptation of two low interest trackers.

A difficult decision.

D.

Edited: Just spoke to NIB. They won't do two trackers. The second loan would be at 3.01%.
 
Is this a troll? Otherwise your advisors must be extremely brave, not to mention foolhardy! The tax treatment on this point is not a matter of interpretation as you contend. The law is quite clear and has been reinforced by repeated and unequivocal Revenue statements. If you ignore these, you are setting yourself up for the prospect of future tax problems and your accountant and financial consultant are setting themselves up for the prospect of future malpractice cases.
 
The law is not entirely clear and that is the reason why Revenue have provided guidance in this area.

The most relevant piece of advice is contained in pages 13, 14 and 15 of Tax Briefing 50 - [broken link removed]
 
Many thanks for the link.

I spoke with AIB this afternoon. They suggested borrowing an extra €100k and paying off the loan on the apartment.

They reason that by putting the full €300k against the house @ 2.75% fixed in year one, followed by a 2.95% tracker (assuming current rates) thereafter, in addition to our mortgage interest allowance, we would be better off.

They argue that structuring it this way would more than offset any loss incurred by not having an apartment loan against which to make deductions on our rental income. Particularly so since the rate on that loan would be less competitive than the tracker loan.

On balance, this seems to be the way to go. My accountant seems to agree.

Thanks for all the advice.

D.

Edited: Contrary to what I wrote above, we would still be entitled to deductions on rental income tax on the apartment loan. We are, of course, merely moving the €100k on the apartment from EBS to (relatively) cheaper AIB.
 
Only now had a chance to print off and read the Revenue document that was linked above.

Very interesting.

Whatever qualms people have about borrowing against the rental property in terms of interest relief, it seems to me that borrowing the lot against the new house is the way to go.

a. The entire loan (€300k in our case) is eligible for the tracker rate.

b. €200k of the €300k is eligible for mortgage interest relief.

c. Tax on rental income from the apartment can be reduced by being offset against the interest paid on the remaining €100k.

Effectively, a triple whammy since the benefit of the tracker rate was not an issue in the first permutation.

Page 14 of the link dealing with "Amalgamation of loans..........." seems to me to be the key:

"........interest on amalgamated borrowings....will qualify for relief where:


.....each rented residential property can readily identified and traced back to the original borrowings and............

Borrowings were amalgamated for genuine commercial reasons (e.g. the pursuit of a more competitive interest rate, as mentioned earlier in the same article) ......and not the avoidance of tax."

Is this a complete no-brainer, or am I missing something?

While I won't be availing interest relief against rental income on the entire €300k, I will be availing of a lending rate far lower than the current buy-to-let rates on the €100k on the apartment. Killing off the existing apartment loan with EBS and moving to AIB seems to be the way to go.

I would be interested to know why those who posted above that they had been in a similar situation, didn't pursue this option? Or maybe you did?

Thanks.

D.
 
For what it's worth this topic explains why it might be a good idea in some or all circumstances to raise an interest only mortgage against rental property.
 
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