Can mortgage interest be offset against foreign rental income?

[Bronte]

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”.

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Capricorn did the revenue official bold and underline the words in your post.

I completely agree with Mandelbrot that this particular revenue official have got the whole interpretation incorrect.

I also had a good read through of the 'manual' IT 70 and for sure you are allowed the interest.

In addition in relation to the above part I've copied of the revenue's letter, revenue are incorrect because that top up loan was not used for your Irish property and so cannot be written off against it.

Could you tell us the rank/title/level of the revenue official our are dealing with, don't need their name or anything. It's just to see where you should esculate this to.

I'm absolutly amazed that they wrote you such a letter. If what they are saying is correct then there would be a very large amount of Irish landlords who bought in Spain/Bulgaria etc would be seriously out of pocket.

________________

One intersting thing I noticed was that apparently for foreign rentals the 75% rule doesn't apply - am I reading that correctly? Also I hadn't realised that since my last reading of the IT 70 a couple of years ago now, they have seriously modified it. The following is taken from the IT70.

"Interest On Borrowings

The 75% restriction does not apply to loans taken out to finance non-residential property and the full amount of interest continues to be deductible in such cases. In the case of mixed residential and non-residential properties, interest should be apportioned on a just and reasonable basis before the restriction is applied to the residential part of the interest"

 

[Bronte]

Also of relevant Capricorn is the following on page 15

Foreign Rents


The same deductions are available in computing the taxable rental income as if the rents had been received in the State. A deduction for interest paid on borrowed money used to purchase, improve or repair property located outside the State is available only where the rents would be chargeable to tax under Case V of Schedule D if they arose in the State.

 

[Bronte]

Then that document has a link to another document called Foreign rental income and on page 3 (of 6) there is the following

___________________

"What expenses and deductions are allowed?

Only those expenses and deductions that are specified in the Tax Acts and that are wholly and exclusively incurred in connection with the earning of the rental income are allowed. The types of expenses and deductions that are generally allowed are the cost of managing the property, cost of insurance, cost of repairs, local authority rates, interest on borrowings to purchase the property "
_____________________

also page 5 (of 6)

"Interest Relief

I borrowed money from a bank to pay for the foreign property. Am I entitled to a deduction for the interest that I have to pay on this loan?

Interest on borrowed money that is used to purchase, improve or repair a rental property can (subject to certain conditions) be claimed as a deduction against the rental income from that property. However, for interest accruing on or after 7 April 2009, the deduction in the case of residential investment property is restricted to 75% of the interest otherwise allowable. The borrowed money must be used to directly purchase, improve or repair the property. For example, if you cannot directly purchase a property in a particular country and, instead, you purchase the property through a company that in turn purchases or owns the property, you will not be entitled to an interest deduction. This is because the borrowed money has been used to purchase an interest in the company and only indirectly to purchase the property."

______________________________________

Absolutely nowhere in any of these documents does it state that the borrowings have to be actually secured on the foreign property to be allowed. In your case your top up on your Irish property was for the sole purpose of purchasing the foreign property. So to me to 'directly' purchase it.

 

[mandelbrot]

As any of the tax people on here will tell you Bronte, all of that Revenue material you've quoted comes with heavy caveats & disclaimers - at the end of the day the legislation is king, so I think it bears repeating:

"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."

Everything you've just quoted derives from this, and is consistent with it. Talk of security for loans is redundant - it has no bearing on deductibility.

What the Revenue official dealing with Capricorn's case has written is not consistent with it, and is as a result of a misunderstanding of either the legislation (and manuals etc derived from it), or of the facts in the specific case.

 

[Bronte]

And finally and I think very pertinately in the IT70 page 5 (of 15)

Please refer to Part 4.8.6 (PDF, 54 KB) and Part 4.8.10 (PDF, 43 KB) of the Income Tax, Capital Gains Tax and Corporation Tax Manual for further information on the deductibility of loan interest

Looking at 4.8.6 which is a document that specificially deals with borrowings - I'm just quoting relevant bits


The provisions of [FONT=Liberation Serif,Liberation Serif][FONT=Liberation Serif,Liberation Serif]s[/FONT][/FONT]ection 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
[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]_______________________________________

Sorry Capricorn if I'd done too much quoting but I think finally I've found in section 2 above you have in the second sentence exactly what you need

It is not necessary that the security offered should be the permises that is let for the interest to be deductible.

Maybe someone else could help you in your letter back to the offical. You can either quote all of the relevant sections to the official or maybe just the last paragraph I've posted here. Maybe Manlebrot who knows how these appeals work can help on this. He's certainly trained in accountancy and gives great qutoes from the legislation.

 

[Bronte]

As any of the tax people on here will tell you Bronte, all of that Revenue material you've quoted comes with heavy caveats & disclaimers - at the end of the day the legislation is king, so I think it bears repeating:

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I agree with you that the legislation is king and I think with the last document I've linked which seems to be to be exactly what Capricorn needs as it's deals with security. It's very hard for an ordinary person to quote legislation in letters to revenue officials. And you run the risk of them running rings around you in their replies.

Maybe he is dealing with someone in revenue that is dead set on his ways and he needs to get beyond this person.

Also I think it's very important to point out that despite all these guidelines having caveats & disclaimers, it would be extraordinary that if borrowing on one property to purchase another was disallowed that this would not be highlighted. So far we've not found that anywhere, neither legislation nor guidelines.

I'm exhausted !

 

[mandelbrot]

I agree with you that the legislation is king and I think with the last document I've linked which seems to be to be exactly what Capricorn needs. It's very hard for an ordinary person to quote legislation in letters to revenue officials. And you run the risk of them running rings around you in their replies.

Maybe he is dealing with someone in revenue that is dead set on his ways and he needs to get beyond this person.

Also I think it's very important to point out that despite all these guidelines having caveats & disclaimers, it would be extraordinary that if borrowing on one property to purchase another was disallowed that this would not be highlighted. So far we've not found that anywhere, neither legislation nor guidelines.

In this case it is actually simpler to just quote the legislation - that's why I keep quoting it - it's a very simply worded provision.

Ironically you've gone full circle here, because you are now quoting the exact paragraphs from the manual that have caused the confusion!!

You are certainly right about Capricorn needing to get beyond the particular person.

If it were me, I would simply start quoting that single line of legislation, based on which a deduction must be due, and ask for them to make a formal determination quoting the provision which they believe supercedes that. They can't. (Or if they do they'll be wrong, and boy would I would hate to be them in front of Mr Kelly or O'Callaghan at the Appeal hearing; they'll get eaten alive.)

But Capricorn isn't me, and bearing in mind as Oldnick said dealing with Revenue can be a bit daunting for lay people, it's a situation where paying a couple of hundred quid for a good tax agent to make a couple of calls and get it sorted would be money well spent.

 

[Bronte]

Ironically you've gone full circle here, because you are now quoting the exact paragraphs from the manual that have caused the confusion!!


But Capricorn isn't me, and bearing in mind as Oldnick said dealing with Revenue can be a bit daunting for lay people, it's a situation where paying a couple of hundred quid for a good tax agent to make a couple of calls and get it sorted would be money well spent.

Didn't realise I'd gone full circle myself, but I got intrigued when I started reading the new IT70 (will come back on this again on a different thread) plus I also hate when people have to battle on their own against officialdom.

I think you're right about Capricorn needing to hire a professional. I'm not sure if this is your line of work Mandlebrot but if I were him I'd try and hire you.

 

[Capricorn 1]

Yes,the Revenue bolded and underlined the words in the letter to me. The rank of the Revenue official who signed the letter (decision on my appeal) was Inspector of Taxes.

I will try to get my head around this and phone this official's manager.

 

[mandelbrot]

Yes,the Revenue bolded and underlined the words in the letter to me. The rank of the Revenue official who signed the letter (decision on my appeal) was Inspector of Taxes.

I will try to get my head around this and phone this official's manager.

Just to be clear, the letter you got was not the decision on an Appeal, not in the formal sense anyway. As I mentioned previously Revenue's appeal process is quite a formal one.

I can't stress strongly enough the value of having a professional to fight this battle for you (and that's not me offering because I'm actually prohibited from doing so), but if you won't get one then at least keep us posted...

 

[Capricorn 1]

I'll talk to the senior manager first and take it from there. I may indeed have to get a professional to deal with the matter. There is a few grand involved going back over 4 years.

I'll let you know the outcome.

 

[Joe_90]

Agree with the previous posters, revenues interpretation is incorrect given the information supplied.

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.

@capricorn1, out of interest when you say a normal review of the previous year's returns what do you mean? I presume revenue wrote to asking about various aspects in your return, which you submitted in writing.

 

[Capricorn 1]

It was just my normal annual tax return. I had incorrectly displayed foreign rental income and irish together on the same spreadsheet and this highlighted the issue. They informed me that I owed tax for the previous 4 years and gave me the right of appeal.

I appealed and re-sumbitted my accounts for these 4 years displaying the foreign property on a seperate sheet and apportioned the relevant top ups correctly to be offset against it.

I lost the appeal. Taking the advice given of this forum, I took the matter up with Revenue again quoting the paragraphs of the manual outlined by Mandelbrot.

 

[Bateman]

Sorry, when you say "appeal" do you just mean to another Revenue official or do you mean to the Appeal Commissioners?

I've read the thread - Shocking stuff.

Interest borrowed on (say) a person's PPR and used to purchase a foreign property is clearly deductible from rental income from that property.

The level of incompetence being displayed is appalling.

On a related note, Finance Bill 2013 provides that foreign rental losses cannot be offset against Case III income. Many practitioners had taken the view that foreign rental losses could be offset against (say) government bond interest (with Revenue disputing this view). The fact that this has now been legislated against suggest that the practitioners may have been correct.

 

[Capricorn 1]

I was given the right of appeal within a certain timeframe. I just sent in a letter of appeal stating my case. I was not called to an appeal hearing.

 

[Bateman]

I was given the right of appeal within a certain timeframe. I just sent in a letter of appeal stating my case. I was not called to an appeal hearing.

Did you get a Notice of Assessment and appeal that?

This is shocking...nuts in fact.

Everytime I'm surprised at something a Revenue official tries to pitch as correct, I say "I'll never see anything as bad as that". And then I do.

 

[mandelbrot]

Many practitioners had taken the view that foreign rental losses could be offset against (say) government bond interest (with Revenue disputing this view). The fact that this has now been legislated against suggest that the practitioners may have been correct.

Just because something is spelt out in legislation to avoid any possible ambiguity doesn't necessarily mean that the person(s) who suggested a different interpretation were correct - surely that's for the courts to decide?

 

[Bateman]

On a related note, Finance Bill 2013 provides that foreign rental losses cannot be offset against Case III income. Many practitioners had taken the view that foreign rental losses could be offset against (say) government bond interest (with Revenue disputing this view). The fact that this has now been legislated against suggests that the practitioners may have been correct.

Just because something is spelt out in legislation to avoid any possible ambiguity doesn't necessarily mean that the person(s) who suggested a different interpretation were correct - surely that's for the courts to decide?

As a tax person, you should have noted my use of the words "suggests" and "may". Of course it doesn't definitively prove anything, however if the "Case III/single source" argument had no merit, there wouldn't have been a need to change the legislation.

 

[mandelbrot]

As a tax person, you should have noted my use of the words "suggests" and "may". Of course it doesn't definitively prove anything, however if the "Case III/single source" argument had no merit, there wouldn't have been a need to change the legislation.

Wow, aren't we aggressive - 30 posts in and you're already at everyone's throats!

Since we're into note taking, maybe you should note my use of the words "doesn't necessarily mean"...

Do you disagree withe the point I made? Is it, or would it not be, for the courts to decide?

 

[Bateman]

Wow, aren't we aggressive - 30 posts in and you're already at everyone's throats!

Since we're into note taking, maybe you should note my use of the words "doesn't necessarily mean"...

Do you disagree withe the point I made? Is it, or would it not be, for the courts to decide?

True.

Are you aware of any cases that made it to appeal on this point? I've only seen one and it was settled. I've come across quite a few advisors (Big Four included) who've adopted "Case III/single source" treatment, with some caveating their advice and some not bothering at all.