Income TAX concern - second property!

S

superd

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Hi,

I have a query relating to a property im purchasing. I already have a 2 bed apartment as my sole residency, and this purchase will be my second property.

The thing is im not sure whether im going to move into this new property myself, or the more likely option is to renovate the property (needs some work), and sell it on next year maybe, at a potential profit (this is likely, as i am getting a very good deal on the property).

The KEY point is at no point will i be renting this property out, will be one or other of the above options.

Im not sure what my restrictions are here in relation to TAX. The purchase price is 170k and I would be hoping i could put some work into the house and sell it for 200k+ in 2014, if i dont decide to move in permanently.

Can you advise what would be the issues with income TAX here, if i kept the property for 6-12 months (without renting) and sold for a profit, am i liable for income tax?

Im happy to live and declare this second property as my primary residency if it means im NOT falling into the income tax bracket.

But im wondering where does that leave me with my current 2 bed apart, and going forward should i want to sell that, what are the TAX implications?

Just a little confused how the whole thing works RE second property. And as stated above i would like to try protect any profit i can make from the refurbishment and resale of this property, which i feel might be the likely option here for me.

Is declaring this new property as my primary residency my only way of doing so?

Thanks - D
 
Income tax only comes in to play if you rent it out i.e derive an income from it.

If you buy, renovate and sell then you will pay CGT on the gain @33%. If you buy before 31 December 2014, retain the property for more than 7 years and then sell at a gain there will be no CGT.

Your current property will be exempt from CGT as it is, and assuming it always was, your principle residence. If you switched homes some CGT may be due on the first house if a gain arises.

Example. House 1 purchased 1/1/2010 for €100K. Lived in til' 31/12/2013. Rented/made other prop' your principle residence on 31/12/2013. Sold on 31/12/2017 for €150K. So you owned house for 8 years and it was your home for 4(3 + add a year). So gain of €50K is half relieved. Therefore taxable is €25K.

That's a very simple example.
 
Hi,

Thanks a million for response, and example.

Just one or two more queries on this...

Say i declared my new property as primary residence for 6 months, then sold it at a profit, i wouldnt pay any tax on the gains?

**Also is anyone aware if anything in the budget might affect this? Did i read somewhere properties purchased next year are exempt from CBT? Is that both primary and buy to let?

The reason I am looking at this route is my older apartment is in negative equity, and will be unlikely sold at a profit any time soon, so i feel im best declaring this as my second property.. does that make sense, or is there some loophole here i need to watch out for?

Also im signing for the new property in the next month, but the residents are not due to move out until january, which means they will be paying rent for 2 months. Does this automatically bring me into CBT should i sell the property down the road? Or does this just affect income TAX (i.e. rent income)?

Should i make sure they are out before signing for property, to avoid hassles later?

Thanks again, major help :)
 
You really need to think about this more than you are. I am no expert on tax, so perhaps some of the following will be over-ruled to some extent by experts. This is not a simple black and White issue.

If you receive rental income from this new property, you must declare this for income tax. As a new owner of the property, you may need to get a new lease drawn up and register the tenancy with PRTB.

As it's a rental property for a period, it can't be your PPR for that period of time, so pro rata CGT may also apply for this period of your ownership. You can't have the best of both worlds.

Additionally, you say this is a do up job. If the house is your PPR, you cannot offset expenses on renovations against capital gain. If it's not your PPR, you could do so. You will also have property taxes to pay on both for 2014.

Meanwhile, the negative equity on a PPR is not a capital loss for CGT purposes.

As a word of caution, if you have a property in negative equity, is it a good idea to be buying more property?
 
Hi, thanks for your feedback!

Luternau said:
If you receive rental income from this new property, you must declare this for income tax. As a new owner of the property, you may need to get a new lease drawn up and register the tenancy with PRTB.

As it's a rental property for a period, it can't be your PPR for that period of time, so pro rata CGT may also apply for this period of your ownership. You can't have the best of both worlds.
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The only reason the tenant will be there is the seller informs me they cannot move to new property until january. Then i will declare as PPR.
(the seller is a friend and is under pressure to get the deal done before xmas, hence generous price)

Would it be critical i make sure tenant is gone before signing? I guess my question is, because i have had someone there for 2 months, does this bring it into CBT 6 months down the road, or is that based on current situation??

Luternau said:
As a word of caution, if you have a property in negative equity, is it a good idea to be buying more property?
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My apologies, im not in negative equaty with bank. My aprtment was bought for 260k, mortgaged 220k.. and property is now worth what i owe the bank. So im level with bank, but personally taken a loss.
 
Couple of points:

It is CGT (capital gains tax), not CBT, have a look on Revenue's website - they have pretty comprehensive leaflets about it.

Any rent received will be taxable as income. Not receiving any rent does not make it your principle primary residence (PPR). You cannot merely "declare" a house your PPR, you have to live there. I believe this is different in the UK which may be causing some confusion.

If your friend is selling you the house at below market value there may be an exposure to CAT (capital acquisitions tax, aka gift tax).
 
superd said:
The purchase price is 170k and I would be hoping i could put some work into the house and sell it for 200k+ in 2014, if i dont decide to move in permanently.
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Are we back in 2006 again? Are you borrowing to buy the 2nd property, and are you clear on the risks involved in this kind of property investment?

What happens to your overall financial situation if you just break even on the deal, or say lose €10k when you sell?
 
Ham Slicer said:
Income tax only comes in to play if you rent it out i.e derive an income from it.
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I'm sure that a Revenue auditor would take a different view. If the OP buys the property with the intention doing it up and selling it and finances it on short term finance that there is an argument to say its income tax not capital gains tax at all.

I am of the view that there should be a reducing basis of CGT based in duration owned say 45% if owned for one year reducing to 33% after 5 (Of course it would be exempt if held for 7) to capture things like this, which are a clear abuse of the system. But that is not going to happen now.

Principle Private Residence relief is there for a reason, its not there so that people can buy property claim to live in it and avoid paying tax on any gain.

I would also agree with Rainyday about the merits of getting a good deal and flipping it.
 
Thanks all for the feedback.

I have been advised that once i declare new home as PPR and live in it for 12 months, its sufficient to avoid CGT, would that be correct?

Im wondering if by then the property is worth e.g 220k after renovating etc., is there something which could possibly bring the sale into CGT, because theres a 50k profit? (this is just a guestimate)

My second option (and possibly safer option) is following the 7 year plan, and avoid living in it altogether, where there is no CGT once held for that period. And stay put, having new house rented out, and declared as that- i was just hoping not to be tied into another mortgage for that period!

The route of declaring as PPR temporarily (12 months), renovating and flipping, might that be more risky?

And apologies, Im not very clued in on the whole tax/property area, was just an opportunity that arose recently, and i really wanted to try avail of, in the safest manor possible.

Thanks again.
 
superd said:
I have been advised that once i declare new home as PPR and live in it for 12 months, its sufficient to avoid CGT, would that be correct?
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You've been told earlier in the thread that you don't get to 'declare new home as PPR'. Your PPR is where you live. If you live in the house for the duration that you own it, there is no CGT when you sell. However, this will then affect your original house, when you eventually come to see it, as this will not have been your PPR for the full period of ownership, so you will have a CGT liability.

superd said:
Im wondering if by then the property is worth e.g 220k after renovating etc., is there something which could possibly bring the sale into CGT, because theres a 50k profit? (this is just a guestimate)
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If it has been your PPR, there is no CGT liability. Unless, Revenue decide that this is effectively your trade, in which case they could decide to apply income tax to your capital gain.

superd said:
My second option (and possibly safer option) is following the 7 year plan, and avoid living in it altogether, where there is no CGT once held for that period.
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Where did you get the idea of 'no CGT once held for 7 years'. This does not apply in Ireland. When you come to sell, CGT will apply, or worst case, income tax.

superd said:
And stay put, having new house rented out, and declared as that- i was just hoping not to be tied into another mortgage for that period!
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I take it this means that you are borrowing for the new house. If so, this hugely increases the risk that you are taking.

No disrespect, but I get the feeling that you're rushing into this without really understanding or considering the risks. If you'd like to outline how much of your own money you plan to put into this venture, and how much you intend to borrow, posters can help you to understand the risks involved.

superd said:
And apologies, Im not very clued in on the whole tax/property area, was just an opportunity that arose recently, and i really wanted to try avail of, in the safest manor possible.
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Again, no disrespect, but if you're not very clued in on the whole property/tax area, why are you planning to make a six-figure investment in this area? This is a huge decision, and could have a huge impact on the rest of your life. At a very minimum, please go read the many stories in the mortgage arrears forum of people, some of whom rushed into property investments, sure (as you are sure) that they would never lose money.
 
RainyDay said:
Where did you get the idea of 'no CGT once held for 7 years'. This does not apply in Ireland. When you come to sell, CGT will apply, or worst case, income tax.
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There is a temporary relief whereby properties purchased in 2013 (extended to 2014 in budget) and held for at least 7 years are exempt from CGT for the first 7 years. Not sure how it works but I assume there is a deemed disposal on the 7th anniversary. It's an attempt to lure back property investors.

Other than that I agree with everything you say.
 
I agree with what's been said above too. By your own admission, you dont seem to have much knowledge of what you are getting involved with. Which is worrying enough. More worrying though is that your main concern seems to be avoiding tax, rather than the soundness of your plan.

When getting involved in avoidance, you need to be sure that you are on the right side of all relevant tax laws, and in being on the correct side of one, does not mean you won't fall foul of another.

I sense your main focus us making a quick buck here but that reminds me of the mentality of 2000-2006. I would advise you to take paid independent financial advice before you do anything. Just because you are getting the propery at a reduced sum, does not make it a sound investment.
 
Mrs Vimes said:
There is a temporary relief whereby properties purchased in 2013 (extended to 2014 in budget) and held for at least 7 years are exempt from CGT for the first 7 years. Not sure how it works but I assume there is a deemed disposal on the 7th anniversary. It's an attempt to lure back property investors.
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Have we learnt nothing? Thanks for the clarification, and sorry for any confusion caused.
 
Mrs Vimes said:
. Not sure how it works but I assume there is a deemed disposal on the 7th anniversary. It's an attempt to lure back property investors.
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I find that part of the new CGT exemption very vague. Say you sell in year 10 and you've made a gain of 100K. Do they decide you pay tax on 3/10 of 100K. What if your property went up 100 K between year 1 and 5 and no increase from year 5 to 10, you're gain is within the first 7 years, and you shouldn't have to pay any CGT.
 
superd said:
Say i declared my new property as primary residence for 6 months,

The reason I am looking at this route is my older apartment is in negative equity,

Also im signing for the new property in the next month, but the residents are not due to move out until january,

Should i make sure they are out before signing for property, to avoid hassles later?
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I'm not sure yet if you're at tax avoidance or evasion. How are you financing the new property, I'm surprised that you'd be able to get a loan if your in NE? You seem awfully sure of making a profit, what are you basing your figures on.

Did you solicitor not advise you on purchasing with sitting tenants? What if they don't want to move out in January? What are you signing next month? Contracts?
 
Thank guys.. and yes i did spring this idea very recently, with clearly limited exposure to this type of thing. So please excuse my naivety here.

Ok might be best offering some figures here, might make things a little clearer!

My current mortgage is on a tracker, valued at 180k.. and i owe 165k = +15k. Property is a 2 bed apart, prime located in dublin city centre.

This new property will cost me 170k, 125k mortgaged 45k cash (5 years savings). Mortgage payments will be approx. 650€ / month. (i have a very strong position in IT, so no major hurdles getting mortgage approval).

The property itself is a 4 bed semi in a nice estate in dublin 15. Also the rental on this property is very strong (approx. 1300 per month).

A similar house sold for 215k in past few weeks in same estate- albeit in pristine condition.

This particular property is not in great condition, so needs about 15-20k worth of work, but my whole family are builders, and have experience myself so will be a project for me to get my hands dirty, plus i can write some of that off as tax I believe.

Im likely going to take the 7 year option here guys, as the quick sale and moving myself in for 12 months seems a bit too tricky, thought it was a simple process (and for the record i wasnt looking at tax evasion/avoidance).

I have calculated a yield of around 7-8%, and can well afford both mortgages on my wage, if the sh*t hit the fan down the road for any reason - so wouldnt quite say im living in the gravy train days of 2006.Also i think banks are fairly strict now lending money, and will pull the plug as soon as they think someone is potentially in over their head

Any further thoughts on the above figures much appreciated.

And thanks a million for everything thus far guys.

Also I am meeting solicitor this week to discuss legal stuff, and obviously some of the above points.
 
Tax avoidance is a good thing.

Your figures look fine. House value based on rental is spot on. Rent is good, particularly when you compare it to mortgage cost. What mortgage rate and term is that at €650?

How are you going to fund the repairs of 20K. Are you sure that 20K is enough, what are you planning on doing? Have you factored in the costs of acquisition.

You've a decent amount saved and have people in the building trade. Plus you can afford both mortgages. Loan to value is 75%. All good.

Not sure they will lend though, as you're in NE on the apartment. What's the potential rent there and how much is the mortgage? Have you asked your bank if they will let you borrow?
 
Bronte said:
Tax avoidance is a good thing.

Your figures look fine. House value based on rental is spot on. Rent is good, particularly when you compare it to mortgage cost. What mortgage rate and term is that at €650?

How are you going to fund the repairs of 20K. Are you sure that 20K is enough, what are you planning on doing? Have you factored in the costs of acquisition.

You've a decent amount saved and have people in the building trade. Plus you can afford both mortgages. Loan to value is 75%. All good.

Not sure they will lend though, as you're in NE on the apartment. What's the potential rent there and how much is the mortgage? Have you asked your bank if they will let you borrow?
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Well i meant illegally so.. :)

As mentioned the refurbishment will be done personally along with family, so pretty much no costs around manual labor. Id imagine 3-4k for materials will cover it approx. The core stuff anyway.

I have been approved for mortgage, thats the not the problem. My questions were around renting or living, and best way to go about it tax wise etc.

My current place will fetch 1200 rent all day long.

I am not in NE, +10-15k approx. Im personally at a loss as i paid 260k for an apartment thats now worth 180k. But only owe 170k on mortgage.
 
superd said:
I am not in NE, +10-15k approx. Im personally at a loss as i paid 260k for an apartment thats now worth 180k. But only owe 170k on mortgage.
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Ok, your focus in only on CGT. It's actually very simple for you. If you move in and later sell, there is no CGT as it will be your home. If you don't move in there is no CGT if you keep it for 7 years. That applies to anything purchased in 2013 & 2014.

Watch out in Year 8 that you 'realise' the gain then, or be very clear on what they, the government, will allow if the gains happen say in year 9 or 10 etc. How they are going to apportion gains basically.

In relation to your apartment. You have no gain, nor will you have for the forseeable future, so your 'paper' loss of 80K isn't all bad.

I would heed Joe 90's advice on the possiblity of your plan being deemed a trade, particularly if you sell quickly. I believe he is an accountant. It's something you might need to investigate.

Your real decision should be based on where you want to live, buying a decent house now seems like a good idea, as if you marry and have children you'll have a home. If you do well on this property, you might end up in the property game, another source of income perhaps.
 
Guys thanks a million for all the steer here.. its a great site, with some great feedback!!

I reckon i will draw the eye on me tax wise if its buy and flip type purchase, and ends up being a substantial profit over 12 months. I feel renting it for seven years, spreads things a little more evenly, or possibly moving in further down the road for the 12 month period.

Anyway thanks all :)
 
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