Can mortgage interest be offset against foreign rental income?

C

Capricorn 1

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Hi
I topped up an irish investment property mortgage to buy a foreign property.
Can I offset the mortgage interest for this top up against my foreign rental income?

Thanks
 
I did the same. I did not state in writing the reason for the top-up (though the bank mngr knew full well-in those days you could have borrowed any amount for anything -they didn't care). I just asked for an extra XYZ and got it.

I bought a place - crap investment - and use the interest payments (75%)as one of the expences against the rent.

Maybe there's some rule saying this is not correct because I did not state the purpose of the loan, or the top-up -and that the original loan was for another purpose.

But I'm not going to ask Revenue for clarification. If and when they do an audit I'll let them decide then. As far as I'm concerned this is money i bnorrowed ,I bought a place with it, I declare my rent and I deduct the allowable interest.

Do the same.
 
oldnick said:
I did the same. I did not state in writing the reason for the top-up (though the bank mngr knew full well-in those days you could have borrowed any amount for anything -they didn't care). I just asked for an extra XYZ and got it.

I bought a place - crap investment - and use the interest payments (75%)as one of the expences against the rent.

Maybe there's some rule saying this is not correct because I did not state the purpose of the loan, or the top-up -and that the original loan was for another purpose.

But I'm not going to ask Revenue for clarification. If and when they do an audit I'll let them decide then. As far as I'm concerned this is money i bnorrowed ,I bought a place with it, I declare my rent and I deduct the allowable interest.

Do the same.
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Sadly, it's a bit late for me. Revenue have informed me that I can't offset this top up against the rental income on the foreign property. They say it can be offset against the Irish investment rental income where the top up lies. I have never concealed this fact from Revenue in the past, but this is the first year that they have questioned it. I'm wondering if this can be right, that's why I have posted a query on this forum.
 
I'm sorry to hear that. And worried for my selfish sake.
It makes no sense if it can be shown that you used a certain amount of money for a certain purpose. i.e. the investment cost100 units and you used 80/90 units to buy it and are paying interest on those 80/90 units.

It should be no business of Revenue's what you told the bank (in so much as you had a top-up on a loan for XYZ you were effectively saying that the top-up was also for XYZ )as long as you are honestly declaring the interest on money used to buy the foreign property.
Something a real tax expert can only advise on.
Did you get this ruling in writing ?
 
Capricorn 1 said:
Sadly, it's a bit late for me. Revenue have informed me that I can't offset this top up against the rental income on the foreign property. They say it can be offset against the Irish investment rental income where the top up lies. I have never concealed this fact from Revenue in the past, but this is the first year that they have questioned it. I'm wondering if this can be right, that's why I have posted a query on this forum.
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Sounds like someone doesn't know what they're on about, or else you have got the wrong end of the stick, or else they have got the wrong end of the stick.

From Revenue's Operating Manual 4.8.6 ([broken link removed]

"Although rental income from foreign property is assessed as Case III rather than Case V, section 71(4) TCA, 1997 applies section 97(2)(e) TCA 1997 to foreign rental income and provides the same deduction for interest on borrowed money as that allowed in computing Irish Case V rental income... Although rental income from foreign property is assessed as Case III rather than Case V, section 71(4) TCA, 1997 applies section 97(2)(e) TCA 1997 to foreign rental income and provides the same deduction for interest on borrowed money as that allowed in computing Irish Case V rental income."

EDITED to add the important bit:
"2. Security for loan
[FONT=Liberation Serif,Liberation Serif][FONT=Liberation Serif,Liberation Serif]Interest is not deductible where the loan is obtained on the security of the premises but is used for purposes other than the purchase, improvement or repair of that premises. It is not necessary that the security offered should be the premises that is let for the interest to be deductible. For example, where a person obtains a loan that is secured on his or her principal private residence and that is used for the purchase, improvement or repair of a rental premises the interest is deductible."[/FONT][/FONT]
 
I wonder if the foreign aspect is of any relevence here as opposed to the fact that OP used money which he borrowed for purpose ABC (i.e top-up on an existing loan) but used for XYZ.
I don't see what difference it makes whether OP used it for ABC or XYZ but maybe this is what made the taxman disallow the interest.

I did the same as OP and am interested in thsi case. Even more worrying (in the light of op'S case) is that I got a top-up on my home mortgage and used it for a commercial purpose here on which I'm claiming interest allowance.

My attitude is as long as one used the money for a certain claimable purpose (business, investment property) -regardless what was originally said to and by the bank- then one should claim allowable interest .
Maybe I should just keep quiet.
 
I took out the top up for the sole reason of financing the foreign property and informed my mortgage broker at the time (dates of mortgage taken out and date of purchase all match up). From day one, I informed Revenue that I had topped up the irish investment mortgage to buy the foreign property.

Revenue only raised this as an issue this year and have gone back 4 years with it. I had incorrectly displayed the foreign property on the same spreadsheet as my irish property and claimed all the mortgage interest against the irish property. Revenue advised me that foreign losses could not be offset against irish and vice versa.

I appealed - I got details from the bank of the amount of interest paid for the particular top up for the past four years and re-submitted the accounts for each of the four years with the foreign property on a seperate spreadsheet and the mortgage interest apportioned/displayed correctly.

My appeal was not successful, I was told that I could offset this mortgage interest against the irish property, but not the foreign one.

Mandelbrot - many thanks for your reply. I'll take it up with revenue again.
 
ARRGGHHH WAIT A MINUTE!

I just reread what I posted yesterday and realised I copied and pasted the same paragraph twice... I couldn't understand why Oldnick was still concerned. Anyway, the important bit in relation this issue is the 2nd Paragraph from [broken link removed]):

"2. Security for loan
[FONT=Liberation Serif,Liberation Serif][FONT=Liberation Serif,Liberation Serif]Interest is not deductible where the loan is obtained on the security of the premises but is used for purposes other than the purchase, improvement or repair of that premises. It is not necessary that the security offered should be the premises that is let for the interest to be deductible. For example, where a person obtains a loan that is secured on his or her principal private residence and that is used for the purchase, improvement or repair of a rental premises the interest is deductible." [/FONT]

So, Oldnick that should give you peace of mind I hope? All that matters is that the interest you are claiming on a particular property, is interest on money borrowed for the purchase (or repaid or alteration) of that property, but obviously you need to be able to demonstrate that this was the case in the event of audit/query.[/FONT]
 
Capricorn 1 said:
I took out the top up for the sole reason of financing the foreign property and informed my mortgage broker at the time (dates of mortgage taken out and date of purchase all match up). From day one, I informed Revenue that I had topped up the irish investment mortgage to buy the foreign property.

Revenue only raised this as an issue this year and have gone back 4 years with it. I had incorrectly displayed the foreign property on the same spreadsheet as my irish property and claimed all the mortgage interest against the irish property. Revenue advised me that foreign losses could not be offset against irish and vice versa.

I appealed - I got details from the bank of the amount of interest paid for the particular top up for the past four years and re-submitted the accounts for each of the four years with the foreign property on a seperate spreadsheet and the mortgage interest apportioned/displayed correctly.

My appeal was not successful, I was told that I could offset this mortgage interest against the irish property, but not the foreign one.

Mandelbrot - many thanks for your reply. I'll take it up with revenue again.
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I'm not sure that I follow exactly what effect the issue has had on your tax liability; I presume you originally had losses on Irish rental properties that were reducing the taxable income from foreign rents, or vice versa?

Either way, the point Revenue made was correct; Irish rental income is taxed under Case V - so you should be taxed on the aggregate of all Irish rental income minus the deuctions allowed for interest etc

Foreign rents are taxable as Case III income - so you should be taxed on your foreign rents minus allowable deductions, including 75% of the interest on the loan used to acquire the rental property (and see my previous post quoting Para. 2 of the relevant Tax Instruction).

Each of those is a final figure, so if your Irish (Case V) is a loss, then it becomes Zero on your tax return, and the loss carries forward to reduce next year's Case V income. Ditto the Foreign rent (Case III).

I still can't tell whether the problem here is a misunderstanding or a mistake on someone's part (either yours or theirs).
 
I have taken this up again with Revenue. Their answer is still the same. They will allow the interest (on the top up to buy the foreign property) to be offset against the Irish investment property on which the top up was raised. They will not allow me to offset it against the foreign property.

I’m confused about this. If I was sure it was fully correct, I would be happy to accept it, but my reading /interpretation of the legislation is contrary to Revenue’s decision. Is there an ombudsman, I can take this to?

The problem for me is that I have no profits on my Irish investment property and the small profit I have on the foreign property is being taxed at 41%. I have now put this property on the market as it is no longer cost effective to keep it.
 
Capricorn did you quote the relevant sections that Mandelbrot highlighted to revenue in writing ?

Also what exactly did Revenue write back to you? I wouldn't necessarily give up yet, revenue can and do get things wrong, it's just they're very difficult to fight unless you keep going. And they do have an appeal process. But from personal family experience if you can find someone senior in revenue who actually understands this area competently, your best bet is to go that route.

Mandelbrot if you don't mind answering why is foreign rental income classed under Case III and Irish rental income under Case V? Or put another way what's the difference between Case III and Case V?

In any case if I understand you correctly you've to declare Irish rents separate to foreign rents (like they were two separate transaction) but you're still allowed the same deductions either way but cannot offset one against the other.
 
Bronte said:
Mandelbrot if you don't mind answering why is foreign rental income classed under Case III and Irish rental income under Case V? Or put another way what's the difference between Case III and Case V?
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It's because of the distinction between income arising inside the state and outside of the state.

For example employment income earned in Ireland is assessed under Schedule E, but employment income earned outside the state is assessed under Case III of Schedule D.

In both cases because of Section 18(2)(f) TCA 97, as "income arising from possessions outside the State" (an office/employment outside the State has been established under case law to be a "possession").
 
Capricorn 1 said:
I have taken this up again with Revenue. Their answer is still the same. They will allow the interest (on the top up to buy the foreign property) to be offset against the Irish investment property on which the top up was raised. They will not allow me to offset it against the foreign property.

I’m confused about this. If I was sure it was fully correct, I would be happy to accept it, but my reading /interpretation of the legislation is contrary to Revenue’s decision. Is there an ombudsman, I can take this to?

The problem for me is that I have no profits on my Irish investment property and the small profit I have on the foreign property is being taxed at 41%. I have now put this property on the market as it is no longer cost effective to keep it.
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Have you not got a tax advisor dealing with this for you? If not it might be worth your while engaging one, from a cost/benefit point of view.

How has this issue come up? Was it in the course of an audit, or an enquiry of some kind?

There is no ambiguity here - as I posted previously the Manual clearly states that the security for the loan is irrelevant, all that matters is what the money is used for. If you can demonstrate that it was used for acquiring, repairing etc your foreign rental property then you are entitled to your deduction against that income. Have you quoted the relevant part of the manual to the Revenue official dealing with your case?

This is not rocket science - if I, or any half decent tax advisor, was acting for you on this, it would be resolved within a couple of phone calls and/or a quick meeting (assuming you can demonstrate the use of the loan monies on the foreign property).

If you can't/won't get professional help, then you need to escalate first- ask politely but firmly to speak to the person's boss, and if that doesn't get the issue resolved then ask them about the appeals process.
 
The issue came up in a normal review of the previous year’s returns. It was not as a result of a tax audit. I appealed the decision to no avail. I further took it up with Revenue quoting the sections of the Manual posted by Mandelbrot that state the security for the loan is irrelevant and even enclosed a copy.

Their reply was:

“I refer to your own submission as follows: The deductions which can be made in computing taxable Case V rental income are set out in Section 97(2) TCA 1997. Paragraph (e) provides for interest on borrowed money employed in the purchase, improvement or repair of the premises.

In your case the interest paid on said top up loan is being claimed as a deduction against a different property and not the premises as referred to above and therefore does not qualify as a deduction.

Also, the sentence you quote from Part 4.8.6 par.2 which states, “it is not necessary that the security offered should be the premises that is let for the interest to be deductible” would appear to be taken out of context. The actual loan taken out on the premises and the security offered are two different things.

The previous sentence from part 4.8.6 par. 2 quotes “Interest is not deductible where the loan is obtained on the security of the premises but is used for purposes other than the purchase, improvement or repair of that premises” would appear to apply to your particular scenario.

As the top up loan you took out was taken out on the security of the premises itself, the interest payable in respect of said premises is only an allowable deduction against Rental Income from that premises alone”.

They still maintain that any amounts of interest paid in respect of the top up loans , do not qualify as an allowable deduction against my Foreign Rental income.
 
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Capricorn 1 said:
The issue came up in a normal review of the previous year’s returns. It was not as a result of a tax audit. I appealed the decision to no avail. I further took it up with Revenue quoting the sections of the Manual posted by Mandelbrot that state the security for the loan is irrelevant and even enclosed a copy.

Their reply was:

“I refer to your own submission as follows: The deductions which can be made in computing taxable Case V rental income are set out in Section 97(2) TCA 1997. Paragraph (e) provides for interest on borrowed money employed in the purchase, improvement or repair of the premises.

In your case the interest paid on said top up loan is being claimed as a deduction against a different property and not the premises as referred to above and therefore does not qualify as a deduction.

Also, the sentence you quote from Part 4.8.6 par.2 which states, “it is not necessary that the security offered should be the premises that is let for the interest to be deductible” would appear to be taken out of context. The actual loan taken out on the premises and the security offered are two different things.

The previous sentence from part 4.8.6 par. 2 quotes “Interest is not deductible where the loan is obtained on the security of the premises but is used for purposes other than the purchase, improvement or repair of that premises” would appear to apply to your particular scenario.

As the top up loan you took out was taken out on the security of the premises itself, the interest payable in respect of said premises is only an allowable deduction against Rental Income from that premises alone”.

They still maintain that any amounts of interest paid in respect of the top up loans , do not qualify as an allowable deduction against my Foreign Rental income.
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That letter is ridiculous - what Revenue District are you dealing with?

I say it's ridiculous because, in stating why they're denying you a deduction, they have actually referenced the specific Section and Subsection of the Act which provides you with your deduction.

Their letter also clearly illustrates why there is no question that you could ever be allowed the interest as a deduction against your Irish rental income (' “Interest is not deductible where the loan is obtained on the security of the premises but is used for purposes other than the purchase, improvement or repair of that premises” would appear to apply to your particular scenario. ') This sentence should be telling them that you either get the deduction against the property that the money was spent on, or not at all.

Section 71(4) states: "Income arising outside the State which if it had arisen in the State would be chargeable under Case V of Schedule D (i.e. foreign rental income) shall be deemed to be income to which sections 75 and 97 apply, in so far as those sections relate to deductions to be made by reference to section 97 (2)(e)."

Section 97(2)(e) simply states "The deductions authorised by this subsection shall be deductions by reference to any or all of the following matters... interest on borrowed money employed in the purchase, improvement or repair of the premises."

The issue of how, when, where or against what security you borrowed the money is entirely irrelevant.

All that matters, per S.97(2)(e) is that money that was borrowed is "employed in the purchase, improvement repair" of a let premises - if money was borrowed and it was used for the above purpose(s) then you are entitled to a deduction. As I said previously it's not rocket science; I'm flabbergasted TBH.

You need to escalate, ask for a meeting, then if necessary ask them to issue a formal determination against which you can make an Appeal, and then wait a few months for a session before the Appeal Commissioners - this is a quasi-judicial forum, so you'd really need to have a tax advisor familiar with the process to argue your case for you, or else have a very clearly laid out argument, and stating all the facts, submitted in writing beforehand.
 
Mandelbrot - this is extremely helpful. All references to the relevant legislation and advice in your previous posts have convinced me that I should now pursue this further.

Many thanks to all for your replies.
 
This is a horrible story -and has wide implications for many people who invested in property ABC but used property XYZ as security.

Many banks didn't name the investment property on loan papers ,especially an overses one, as long as they had security on an established Irish property. The top-up mortgage was much used in the heady days of the property boom.

I know several people who bought properties, here and abroad, with top-up loans and are claiming the interest payments against rental income.

The idea of fighting Revenue and going to Appeals is a daunting one for most of us - especially when Revenue have put in writing their decision, which assumes a senior official has been at work.


(I confess that I never understood the sections quoted ,first by Mandelbrot and then in correspondence between Capricorn and Revenue.

It does clearly state
"that interest is NOT deductible where the loan is obtained on the security of the premises but is used for purposes other than the purhcase etc .... of that premises"
Very clear. And therefore Revenue are correct.

And then the next words say exactly the opposite "it is NOT necessary for the security to be the premises being let for the interest to be deductible".
This is also very clear and therefore Revenue are wrong.)
 
oldnick said:
This is a horrible story -and has wide implications for many people who invested in property ABC but used property XYZ as security.

Many banks didn't name the investment property on loan papers ,especially an overses one, as long as they had security on an established Irish property. The top-up mortgage was much used in the heady days of the property boom.

I know several people who bought properties, here and abroad, with top-up loans and are claiming the interest payments against rental income.

The idea of fighting Revenue and going to Appeals is a daunting one for most of us - especially when Revenue have put in writing their decision, which assumes a senior official has been at work.
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I wouldn't be making any assumptions as to the seniority of the person who wrote that letter! People in Revenue who've been in the service since they did their leaving cert and never been promoted, or maybe been promoted once due to length of service rather than any particular competence, routinely write letters. I'd say that letter was written by and EO or HEO in a customer service area, who has got themselves caught up in the same logical circle as you (a layperson) have, based on the 2 sentences you quote below.

Hopefully I can clarify this fairly simply - and the key thing here is that context is everything...!

oldnick said:
It does clearly state
"that interest is NOT deductible where the loan is obtained on the security of the premises but is used for purposes other than the purchase etc .... of that premises"
Very clear. And therefore Revenue are correct.

And then the next words say exactly the opposite "it is NOT necessary for the security to be the premises being let for the interest to be deductible".
This is also very clear and therefore Revenue are wrong.)
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OK, so bearing in mind that I said context is everything, here is the end of paragraph 1 and the entirety of paragraph 2 of the manual, which is:

"The provisions of section 97(2)(e) TCA 1997 also apply to the purchase of foreign premises. Although rental income from foreign property is assessed as Case III rather than Case V, section 71(4) TCA, 1997 applies section 97(2)(e) TCA 1997 to foreign rental income and provides the same deduction for interest on borrowed money as that allowed in computing Irish Case V rental income.

2. Security for loan
Interest is not deductible where the loan is obtained on the security of the premises but is used for purposes other than the purchase, improvement or repair of that premises. It is not necessary that the security offered should be the premises that is let for the interest to be deductible. For example, where a person obtains a loan that is secured on his or her principal private residence and that is used for the purchase, improvement or repair of a rental premises the interest is deductible."
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Now, the first part I quoted there simply means that the same rules for computing rental income/losses apply in relation to a foreign property as an Irish one.

Now lets try to decipher what para. 2 means, but in the context of section 97(2)(e), as this is the legislative provision from which it derives - and at the end of the day, it's what 97(2)(e) says that matters.

Sentence 1:
Interest is not deductible where the loan is obtained on the security of the premises but is used for purposes other than the purchase, improvement or repair of that premises.
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This is referring specifically to a particular property, and to a case where someone takes out a loan secured on it, but doesn't actually use the loan on that property. e.g. that celtic tiger-ism of releasing equity from a property in order to upgrade to a BMW X5...
This sentence has no application in the case at hand, except to the extent that it clarifies that there is no way that the interest on the loan in the OP's case can be used as a deduction against the Irish rental property it's secured on. It simply spells out what is common sense - just because you mortgage a property doesn't mean you get relief against the income from that property. (The same principle applies equally to TRS on PPR mortgages incidentally.)

Sentences 2 & 3:
It is not necessary that the security offered should be the premises that is let for the interest to be deductible. For example, where a person obtains a loan that is secured on his or her principal private residence and that is used for the purchase, improvement or repair of a rental premises the interest is deductible.
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This is simply clarifying that it doesn't matter what premises is used as security (in cases where there is security used). Again this merely makes explicit what is common sense.

As I said previously, this whole discussion about loans being secured on this property or that property is a complete red herring - Section 97(2)(e) is about as straightforward a provision as you'll find in the Taxes Acts. It makes no mention of security, because that's irrelevant. What's relevant is that money was borrowed and what it was used for.
 
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