Investors Guide
Investing in residential property is a tax-efficient and low risk method of investing for the future.
Although, like all investments, there is no guarantee that the high house price growth of late will continue into the next 10 or 20 years, a carefully selected residential property is still likely to remain an investment which will provide an income with the possible added bonus of capital growth.
The benefits include regular rental income to cover some or all of the mortgage, the security of investing in a tangible asset as opposed to the more volatile stock market and relatively easy access to finance as the loan will be secured against the property. Also, many of the costs incurred in buying and fitting-out residential property are tax-deductible.
The downside is that, unlike shares, property is not a liquid asset and can’t be sold as easily or quickly. Also it involves more management of the investment – such as finding tenants, and maintenance costs and possible downtime (when the property is empty) that must be factored in as well as the possibility of a fall in rent or an increase in interest rates.
Prospective property buyers in residential property should be prepared to take a long-term view and make sure they are fully aware of the tax implications of their investment.
It pays to research the market well so check out house prices, rental income and potential capital appreciation in a number of areas. Make sure you are aware of any changes that will be happening in the area where you want to buy.
Deposit
Generally, lenders will lend up to 90% of the purchase price of your rental property, once a mortgage provider is satisfied that you can meet the financial commitment and any shortfall in rental income.
Capital Gains
A capital gains tax of 20% will be chargeable on the gains arising from the disposals of your investment property.
The taxable gain is the amount of the consideration as reduced by “deductible expenditure”, that is, the cost of acquisition and certain enhancement expenditure.
Making the most of your rent
Owners of rental properties are entitled to deduct certain expenses from their rental income each year - including repairs and maintenance, management and rent collection fees, rates, insurance, losses from other Irish rental properties, and mortgage interest payments - to arrive at the net amount on which they must pay income tax. However, expenses incurred prior to letting the property are not allowable for tax purposes so for example if you are doing up your house between tenants this is deductible but not before you rent it out for the first time.
From January 2006 if you are not registered with the PRTB (Private Registry of Tenancies Board) you'll have no entitlement to any tax deductions on rental income for that tax year, so if not registered you should do so straight away (deadline is 1st October 2006 for 2006 tax year -cost €70 per tenancy registered)
Individuals who purchase a second property and rent out what was previously their main residence should inform the Revenue, as they will no longer be entitled to mortgage interest relief at source at the standard rate of tax. Instead they can claim a tax write-off for the full amount of mortgage interest against their rental income. Mortgage relief will be available on their new residence.
Capital Allowances
Capital allowances are available in respect of expenditure on capital items, such as furniture for the rental property.
Buying Abroad – Get local advice
Before Irish investors leave their comfort zones, it is crucial they properly investigate and understand the market in which the investment is being considered.
Local assistance will prove invaluable in gaining an understanding of the very different regimes across territories in terms of tax, legal, accounting, the regulatory environment and also culture and language. Remember not to sign any contract until you have it translated!
Annuity Mortgage: Your repayments will cover the capital and interest, which means that the balance is reduced over the term of the loan.
Endowment Mortgage: Endowment mortgages repay only the interest until the end of the mortgage term. You then repay the loan through a life assurance/savings policy.
Pension Backed Mortgage: You build up a fund through a pension plan and use a portion of the fund’s final value to pay off the mortgage. This can be a tax efficient way of borrowing money.
Interest Only: You could also consider a three-year interest-only repayment option. This will reduce your initial monthly outlay and may help to maximise yourtax benefits arising on interest repayments.
Fixed Rate: You can choose a fixed rate of interest for one, three or five years and have the security of knowing the exact costs of your repayments for that period.
Variable Rate Mortgage: Or you can opt for a variable rate mortgage where the repayment will change with any increase or decrease in interest rates.
Interest only mortgages – Something to consider?
You could consider an interest-only repayment option. This will reduce your initial monthly outlay and may help to maximise your tax benefits arising on interest repayments.
Selling the property to pay off the loan is the strategy used by many buy-to-let investors, and if you are definite that the price of your investment will increase and that you want to sell it after ten years, or so, this could be an option.
However if you’re thinking of going down this route as a cheap way of investing in property, and otherwise you could never do it - think it through carefully.
Although mortgage regulations stipulate that lenders should take into account your ability to repay, you could find yourself in trouble when you have to start paying back the capital payments if you have been too confident on your future income. Also, if you have put your own house up as equity it could be in danger.