Two properties: What's the best tax position?

[ubiquitous]

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?

The above seems to refer to a situation where a property owner amalgamates a number of loans where the proceeds of each of the original loans were used to purchase extend or improve a rental property.

What you are proposing is different in that you are buying a PPR with some of your mortgage proceeds - at least that's my understanding. Am I correct?

 

[Dinarius]

Clubman,

Many thanks for the link. Will look into it.

ubiquitous,

You are correct.

But, the example given on p.14 of the link refers to a mixture of PPR and investment/rental property.

My reading of the piece is that you have to provide an adequate paper trail to each of the loans. No problem there.

I don't see that having one of them for my PPR precludes anything, but I could be wrong.

D.

 

[Dinarius]

Clubman,

Many thanks for the link. It makes sense if one could be sure of finding a home for the capital repayment money that was guaranteed to at least breakeven. If you know of one, please let me know! ;-) Seriously, I may yet go that route.

AIB said that they will set up two seperate loans against the house (€100k and €200k) so that a crystal clear paper trail is available to my accountant and the revenue commissioners when it comes to claiming the various reliefs. Both loans will be at tracker rates from year two and 2.75% in year one. Not bad!

D.

 

[ClubMan]

It makes sense if one could be sure of finding a home for the capital repayment money that was guaranteed to at least breakeven. If you know of one, please let me know! ;-)

There are a few deposit accounts which I believe currently match/outpace inflation (even after DIRT) and so are arguably breakeven. However deposit accounts are usually not the most appropriate long term savings/investment vehicle.

AIB said that they will set up two seperate loans against the house (€100k and €200k) so that a crystal clear paper trail is available to my accountant and the revenue commissioners when it comes to claiming the various reliefs. Both loans will be at tracker rates from year two and 2.75% in year one. Not bad!

I'm surprised that they are not loading the rate on the investment property to take account of the higher potential risk of default. Does anybody know if this is common (to charge home loan interest rates on investment loans)?

 

[stuart]

Some bank are more than happy to charge PPR rates for property investment

Sometimes depending on loan>equity ratios and sometimes for new business/long established clients

For the cases above they see the higher exposure as less of a threat

[email protected]

 

[Dinarius]

I'm surprised that they are not loading the rate on the investment property to take account of the higher potential risk of default. Does anybody know if this is common (to charge home loan interest rates on investment loans)?

Clubman,

First of all, the loan is against the house not the apartment, so I guess they're covering themselves that way. There is about €650k equity in the house and about €250k in the apartment. As the manager I am dealing with said, "This is a no-brainer for us." Worst case scenario, he knows that the apartment is our get-out-of jail card.

What surprises me is that people take these things as unalterable. I *always* haggle! Money is a product, just like anything else. I never pay the going rate for anything, if I can help it.

On the subject of deposit accounts, I have just mailed an application to Northern Rock. 3.05% is just too good to turn down.

D.

 

[ClubMan]

First of all, the loan is against the house not the apartment

But how then are you expecting to be able to offset mortgage interest against rental income if the mortgage is not secured against and used to purchase the investment property?!

 

[Dinarius]

ps.............I have to say, I have always found AIB to be a seriously impressive outfit. They act like they're doing business rather than just playing at being bankers, if you know what I mean. They approach things creatively, not at all by the book.

And I am saying that as someone who has no personal connection with them. I don't even have my current or business accounts with them!

D.

 

[Dinarius]

But how then are you expecting to be able to offset mortgage interest against rental income if the mortgage is not secured against and used to purchase the investment property?!

Read the link to the revenue site! ;-)

D.

 

[ClubMan]

Oh - sorry, I wasn't paying attention earlier... Are you getting independent advice/confirmation that your planned approach is kosher - just in case?

 

[Dinarius]

My accountant (the best tax wizard I have ever met) and the tax heads in AIB's lending department, both came back to me with identical advice which concurs with (my reading of) the Revenue article.

For the record, AIB said that splitting the loan isn't really necessary, but they would do it, at no extra charge, in order to clarify the paper trail.

On p.14 it says that "The amalgamated loan will be treated as if it were three seperate loans........." Obviously, that would be two in my case, but even that won't be necessary now.

On the same page (top of column three) "It is not necessary that the security offered is the premises which is let............"

And why should it be? The only point at issue, surely, is that the €100k (in my case) was used to purchase the apartment and nothing else. Security is the bank's concern, not Revenue's. At least not here.

D.

 

[Dinarius]

For the record and in case it might be useful to someone else with an investment property:

In the end we went with the AIB offer.

We borrowed €200k towards the purchase of our new house and an additional €100k to close out the EBS mortgage on our apartment and transfer it to AIB.

Two seperate loans have been setup in order to provide a clear paper trail back to the apartment for the purposes of tax deductions on future rental income.

The entire €300k is secured against the house.

Because we are deemed new business, the entire €300k benefits from the 2.75% one year fixed rate, notwithstanding the fact that the apartment is an investment property.

After one year the entire €300k will switch to AIB's tracker mortgage rate, currently 2.95%.

Ask and you shall receive, as they say! ;-)

D.

 

[Purple]

Hi Dinadius,
That is the way I did it a few years back with a house that was my PPR that was being rented out and a new house that was my new PPR. One loan from First Active for the lot and the interest on the portion of the mortgage outstanding on the investment property used to offset against rental income. Revenue and my accountant are happy with the arrangement.
I also agree with you about haggling on interest rates; BOI are giving me their homeowner discount rate on another investment property at the moment. When I told them that I would close all accounts and move to another bank they played ball.

 

[Dinarius]

When I told them that I would close all accounts and move to another bank they played ball.

I am not surprised, but well done anyway.

People can think that bank's are doing them a favour (make no mistake about it; in the case of some people, they are!) and that they must tick all the boxes in order to succeed. Cobblers!

Buying money is like buying anything else. Never, ever pay the going rate without haggling first.

Your success is only superficially based on correctly answering all the questions on the application form. Credit history, job security, loan security and your relationship with your bank manager are far more important.

D.