# The Return of Property Tax Incentives



## cork (7 Dec 2011)

Can't believe property breaks are back while students, fuel dependent and the disabled are hit.

Has this country learnt anything?


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## Paddyman (7 Dec 2011)

It's just Fine Gael looking after their own...auctioneers....solicitors.....agents.....


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## micmclo (7 Dec 2011)

cork said:


> Has this country learnt anything?



Ireland is different 
Look at all the immigration, they need rentals
God is not creating any more land 
Worst that will happen is a soft landing
Disagree? Bertie had a suggestion for you, go find a rope 



And in twenty years we'll repeat it all over again


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## DerKaiser (7 Dec 2011)

What are the incentives and why are they wrong in the current climate?

If we flog the builing industry into the ground for a generation we actually will end up with the same frantic activity following years of under supply that we had before.

In short (this is not a discussion on price) we need to differentiate sustainable activity (and sustainable tax revenues from that activity) from the previous madness and encourage it.

People quickly forget that this state was blighted with chronic under supply of adequate housing for most of its existence which created the damaging pschye of owning at all costs. It would be an equally damaging national pschye to discourage any form of property market activity for a generation.

There is a 6% stamp duty on commercial property purchases that is generating nothing beacuse no one is buying property. A 2% rate and some transactions would be far superior, it doesn't mean we'll go on a building orgy but it just might attract someone foreign multinationals or encourage indiginous expansion.  

There is nothing inherently wrong with encouraging the use of some of the property overhang that is currently lying idle.  We've built these things at a huge cost. Anything that salvages something out of this already sunk cost cannot be bad.


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## Leo (7 Dec 2011)

And who benfits most from these measures? Nama! Oh, and by extension, the tax payer.


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## Firefly (7 Dec 2011)

DerKaiser said:


> What are the incentives and why are they wrong in the current climate?
> 
> If we flog the builing industry into the ground for a generation we actually will end up with the same frantic activity following years of under supply that we had before.
> 
> ...



Would it not be better to see money and investment targetting both export led and tourism companies that bring money into the country rather than to something that adds no value at all and simlpy ties up capital?


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## Leo (7 Dec 2011)

Firefly said:


> Would it not be better to see money and investment targetting both export led and tourism companies that bring money into the country rather than to something that adds no value at all and simlpy ties up capital?


 
But what is the net effect of these moves? 

Surely bringing in foreign investment is of value?


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## Firefly (7 Dec 2011)

Leo said:


> But what is the net effect of these moves?
> 
> *Surely bringing in foreign investment is of value?*



Exactly...if the government wants to interfere in the market, surely it would be better if it offered incentives to companies who export and those involved in tourism (both of which bring money into the country) rather than incentivising property purchasing (which just ties up capital in bricks and mortar).


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## Leo (7 Dec 2011)

Where's the evidence you have to support the argument that this is going to cost money that could have been spent elsewhere?

As with much in taxation, an incentive like this will have a return. The direct cost is estimated at €64M for 2012, but how much will the Government gain on sales of assets held by NAMA that would otherwise remain unsold. How much will they gain from commercial rates on buildings that would otherwise have been unoccupied? Tax on salaries on jobs created as a result, etc., etc..

In the grand scheme of things, €64M isn't much.


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## Firefly (7 Dec 2011)

Leo said:


> Where's the evidence you have to support the argument that this is going to cost money that could have been spent elsewhere?
> 
> As with much in taxation, an incentive like this will have a return. The direct cost is estimated at €64M for 2012, but how much will the Government gain on sales of assets held by NAMA that would otherwise remain unsold. How much will they gain from commercial rates on buildings that would otherwise have been unoccupied? Tax on salaries on jobs created as a result, etc., etc..
> 
> In the grand scheme of things, €64M isn't much.



For evidence all we have to look at is what happened on a grand scale for the past decade where we had such property incentives.....everything went into property and we forgot how to make stuff that actually sells (excluding some firms and multinationals). 

I agree though, that there may be a return for the government, but as money is a scarce resource, incentivising it's allocation into purchasing property will result in less money going towards other things. 

I agree that 64m is not a lot in the grand scheme of things but (and I'm not even sure if this is allowed by Europe)  for the same cost the government could pay return flights for *128,000* Americans (500 euro per ticket) to come over here for free. I think this would have a much better boost in a very short time to our economy. In fact, if this was allowed, we could replace Bord Failte with something as simple as this.


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## cork (7 Dec 2011)

DerKaiser said:


> What are the incentives and why are they wrong in the current climate?
> 
> .



When you have scarce resources and put property developers ahead of post grad students & those in fuel poverty - it is very telling of FG/Labour.


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## Leo (7 Dec 2011)

Yeah, I was playing devil's advocate just a little there  

Agreed, previous incentives were ill-advised. Look at how many hotels are now struggling or being run by banks or Nama just to comply with the requirements of the incentives they received. That in turn is also hurting hotels who didn't take advantage of the tax breaks available.

I don't think any of the incentives announced will result in any more building. Nama were a driving force behind these moves, and their being able to shift the commercial property on their books will result in significant return to the public purse. So this one might actually result in a net positive flow.


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## DerKaiser (7 Dec 2011)

cork said:


> When you have scarce resources and put property developers ahead of post grad students.......


 
What's so special about post grads? For God sake if you haven't had the state pay enough towards your education by the time you're 22 you may as well throw your hat at it.

As for property incentives vs disincentives:

*Point 1*:
There's not too many property developers left in business. We, the owners of NAMA, are the biggest property developers going these days. So getting transactions in the market will benefit us financially.

*Point 2: *
On balance the disincentives in the market are huge. Sentiment is terrible and credit is non-existent.

*Point 3: *
Whilst taxation incentives certainly promoted building well beyond what was required you have to agree that stamp duty rates through the boom (9% on residential property in excess of €635k for example) should have been a huge disincentive to transactions. Unfortunately cheap credit drowned out any element of price consciousness.

*Point 4:*
The problem in the boom was that the default position of 'you cannot build enough or own enough property' was held long after it ceased to be sensible. The equivalent braindead mantra now would be to hold the view that 'property is toxic and will always be toxic' long beyond the point where we need to start investing effort into it again. 

*Point 5:*
It is sensible for now to continue to build 25% of the long term required average units for a few more years. The overhang built up through a 3/4 years of building 300% of the required output means this is sensible. But in 5/6 years time we will have to start building at long term levels again. Right now we should be encouraging the people who would have purchased in normal conditions (young couples, families, etc) to take advantage of the unoccupied overhang.

In short, property should be treated as any other commodity, there is a sensible and sustainable level of consumption. If there is overconsumption then it should be discouraged. If there is underconsumption we need to provide incentives and not "punish" the property market by consistently discouraging or even barring people from even considering owning a home for themselves. 

The legacy of the property bust should not be to stigmatise home ownership. That is a long term solution to nothing.


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## Sunny (7 Dec 2011)

DerKaiser said:


> What's so special about post grads? For God sake if you haven't had the state pay enough towards your education by the time you're 22 you may as well throw your hat at it.
> 
> .


 
I am guessing because he is one!


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## Chris (8 Dec 2011)

cork said:


> Can't believe property breaks are back while students, fuel dependent and the disabled are hit.
> 
> Has this country learnt anything?



Simple answer is 'No'. It's all back to property obsession and increasing levels of debt rather than reducing a level of debt that is out of control.

Firefly is absolutely right. This will end up tying up very scarce resources (money) in totally unproductive assets (property). It will reduce the capital available to viable firms that are exporting and bringing money into the country. Very dumb idea.



micmclo said:


> God is not creating any more land



Actually (s)he is, I believe the Galapagos Islands are growing.


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## Leo (8 Dec 2011)

Chris said:


> Firefly is absolutely right. This will end up tying up very scarce resources (money) in totally unproductive assets (property). It will reduce the capital available to viable firms that are exporting and bringing money into the country. Very dumb idea.


 
So how much is it taking off the table?


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## Chris (9 Dec 2011)

Leo said:


> So how much is it taking off the table?



That depends on how much more real estate will be bought as a result of this move, but it will result in more houses being bought than otherwise would have been, as some people will be enticed by the offer.


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## DerKaiser (9 Dec 2011)

Chris said:


> That depends on how much more real estate will be bought as a result of this move, but it will result in more houses being bought than otherwise would have been, as some people will be enticed by the offer.


 
Yeah, but if someone buys property doesn't it free up capital for the person selling it? 

In particular if Google buys an office block from NAMA that surely increases capital and decreases the housing stock owned by NAMA (and therefore us!).  

Less unproductive housing stock, more capital - Win win surely?


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## Chris (12 Dec 2011)

DerKaiser said:


> Yeah, but if someone buys property doesn't it free up capital for the person selling it?
> 
> In particular if Google buys an office block from NAMA that surely increases capital and decreases the housing stock owned by NAMA (and therefore us!).
> 
> Less unproductive housing stock, more capital - Win win surely?



If the property is bought by foreigners bringing money into the country then yes, there will be a capital inflow. But the majority of property transactions are done by Irish residents using mortgages. This means that more credit is tied in property (again) and less is available for productive businesses.


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## DerKaiser (13 Dec 2011)

Chris said:


> But the majority of property transactions are done by Irish residents using mortgages. This means that more credit is tied in property (again) and less is available for productive businesses.


 
Only if the property does not already exist. Otherwise, for each person that ties their money up in property, another will enjoy a release of capital.  

Committing new capital to building housing/commercial property is obviously dumb whilst we have an overhang.  Moving ownership of existing property from someone who's not putting it to any economic use to someone who is, with a transfer of capital in the opposite direction, is not a bad thing for the economy.


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## Leo (13 Dec 2011)

Chris said:


> That depends on how much more real estate will be bought as a result of this move, but it will result in more houses being bought than otherwise would have been, as some people will be enticed by the offer.


 
And what element of the incentives will result in more houses being bought?


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## oldnick (13 Dec 2011)

-the one that means there'll be no CGT if the property is held for 7yrs+.
Its one incentive that has caused me to make an offer.
There ain't many investments that are free of CGT - nor are there many that are yielding over 7% p.a.

Just because one has burnt one's fingers doesn't mean that one should always avoid the fire.


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## Firefly (13 Dec 2011)

oldnick said:


> -the one that means there'll be no CGT if the property is held for 7yrs+.
> Its one incentive that has caused me to make an offer.
> There ain't many investments that are free of CGT - nor are there many that are yielding over 7% p.a.
> 
> Just because one has burnt one's fingers doesn't mean that one should always avoid the fire.



Would you ever stop being such a greedy old man and leave something for the rest of us?


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## Purple (13 Dec 2011)

I'm with DerKaiser on this one.
I see nothing wrong with incentives for a deflated market (if there have to be incentives at all). What we had was incentives for overheated markets. Timing is everything.


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## Leo (13 Dec 2011)

oldnick said:


> -the one that means there'll be no CGT if the property is held for 7yrs+.
> Its one incentive that has caused me to make an offer.


 
There'll be no CGT if the property is held for 7+ years for the first 7 years only. An increased rate of 30% applies after that. (also only applies to property bought before the end of 2013)

I don't see that having a huge impact on the market.

The more significant incentives are aimed at the commercial market.


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## oldnick (13 Dec 2011)

Seven years is just right for me to sell. Just in time for my funeral.


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## Chris (15 Dec 2011)

DerKaiser said:


> Only if the property does not already exist. Otherwise, for each person that ties their money up in property, another will enjoy a release of capital.
> 
> Committing new capital to building housing/commercial property is obviously dumb whilst we have an overhang.  Moving ownership of existing property from someone who's not putting it to any economic use to someone who is, with a transfer of capital in the opposite direction, is not a bad thing for the economy.


It all depends on what the seller does with the money. If the seller is not looking to but trade up, but is rather trading down or simply liquidating investments then the money tied up in the mortgage of the new buyer is offset by additional money available for productive investment by the seller. However, I would say that is a big if given the Irish mentality towards property ownership.




Purple said:


> I'm with DerKaiser on this one.
> I see nothing wrong with incentives for a deflated market (if there have to be incentives at all). What we had was incentives for overheated markets. Timing is everything.



I agree that a CGT reduction will increase investment, but this will result in higher prices than otherwise would have been achieved which is of course very negative for those looking to buy a property. 
But what baffles me most about the move is the total hypocracy. Lower CGT is positive for investment in property, but at the same time they raise CGT rate for all other investments which of course is going to be negative for investment. But what else could you expect from politicians and bureaucrats?


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## DerKaiser (15 Dec 2011)

Chris said:


> It all depends on what the seller does with the money. If the seller is not looking to but trade up, but is rather trading down or simply liquidating investments then the money tied up in the mortgage of the new buyer is offset by additional money available for productive investment by the seller. However, I would say that is a big if given the Irish mentality towards property ownership.


 
Well if the seller also trades up, then the person he buys from has a release of capital.  Somewhere along the chain capital will be released. The only issue would be if the transactions typically result in new money being committed to unnecessary new building projects.  That would be an unlikley scenario and the only one in which the net impact of the incentives would be to tie up more capital in property.






Chris said:


> But what baffles me most about the move is the total hypocracy. Lower CGT is positive for investment in property, but at the same time they raise CGT rate for all other investments which of course is going to be negative for investment. But what else could you expect from politicians and bureaucrats?


 
What other investments did you have in mind?  European or US equities or bonds?  Why wouldn't the Government incentivise the one that keeps money in the country.  

Also, as owner of huge amounts of property the government can generate cash to pay for day to day services (or to pay down the debt owed by NAMA) by getting the market moving.  The government currently generates operational cash by providing tax incentive on its debt (No Dirt on Post Office savings, No CGT on Bonds, etc), so removing CGT on property is a similar incentive to investors to provide it with liquidity.


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## Chris (16 Dec 2011)

DerKaiser said:


> What other investments did you have in mind?  European or US equities or bonds?  Why wouldn't the Government incentivise the one that keeps money in the country.


Because it could be a potentially very bad investment to put money into real estate at current prices which are not clearing. Imagine the uproar in a few years time if people who bought next year, because of the incentive, found themselves in deep negative equity. 



DerKaiser said:


> Also, as owner of huge amounts of property the government can generate cash to pay for day to day services (or to pay down the debt owed by NAMA) by getting the market moving.  The government currently generates operational cash by providing tax incentive on its debt (No Dirt on Post Office savings, No CGT on Bonds, etc), so removing CGT on property is a similar incentive to investors to provide it with liquidity.



Best way to get markets moving is to allow them to find a market clearing price. The only reason houses are not shifting is because people are still not willing to pay the current prices. Anything done to entice market activity through tax incentives artificially alters the price, which is always a negative.
Just because the bad decision was made to create NAMA doesn't mean that we should allow that mistake to be compounded by another bad decision.


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## Ceist Beag (16 Dec 2011)

Chris said:


> The only reason houses are not shifting is because people are still not willing to pay the current prices.



Not sure I would agree with that Chris. I would be more of the opinion that houses are not shifting because people are nervous about job security and because banks are not lending. I think a lot of people feel that house prices are pretty good value right now if they had the money (and confidence in their job security) to buy one.


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## Bronte (9 Jan 2012)

oldnick said:


> -the one that means there'll be no CGT if the property is held for 7yrs+.
> Its one incentive that has caused me to make an offer.
> There ain't many investments that are free of CGT - nor are there many that are yielding over 7% p.a.
> 
> Just because one has burnt one's fingers doesn't mean that one should always avoid the fire.


 
I'd be curious as to your figures on how it makes sense to buy when you factor in all the costs of being a landlord?  You are also assuming a capital appreciation I guess in your figures, what makes you so sure?


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## oldnick (9 Jan 2012)

bronte... (gosh, my second post to you today!) 

Capital appreciation- I'm not sure that property will be dearer in seven years than today. I suppose I think it will be, but this is based on the long-term history on property prices and I admit that everything has changed in recent years so I shouldn't make guesses based on the past.

Costs of being a landlord - I'm not as pessimistic about this as many other people on various posts appear to be. Dublin city centre apts are yielding 10% gross 
e.g. a 120k apt can get a grand a month = 12k p.a.
From that 12k rent p.a. one deducts (very roughly) p.a.
- 400k ins, 
- 300k nppr/prop tax, 
- 300k annual decorating/small items (i.e. 2.100 over 7 yrs)
- 1k p.a. furniture, (i.e. 7k over 7 years)
- 500 k p.a. contingencies (unpaid rent, damage)

That's a cost of 2.5k -but to be on the safe side let's make it a cost of 3.000 p.a. -probably because I've missed something ! (mind you I'm hoping for rent increases...)

At present, if one stays under the higher tax bracket (and I'm now retired with no geat earnings) it means I lose a third of my income so i'll get ca. 6.000 nett nett.

I'm unsure what else one would do with that 120.000 to get 6.000 p.a. after tax.
Even on the higher tax bracket it gets 4.500 which is still a higher post-tax than any other investment.

=================

Actually I'm not going ahead as I've still got too many loans to pay off. But, as another example, I was talking to a friend ,an auctioneer, who has sold several cheap houses in Ballyfermot,Crumlin for an average of 110.000 which the buyers immediately fill with social welfare tenants on minimum of 900 per month payment. Not my favourite tenants,but it's another example of a decent return.

And,they too, are hoping that by 2019 property may be a bit dearer than today -so ,if they sell ,there'll be no CGT.

And,of course, rents may also increase a little over seven years.

Like anyone else I'd love a sure-fire guaranteed recommendation on any other investment....


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## Purple (9 Jan 2012)

oldnick, I always used a 10 month occupancy when calculating expected income back in the day when I was a landlord. I also assumed that decorating would cost more. Service charges at an average of €1'000 would also have to go in there.


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## Sunny (9 Jan 2012)

There are plenty of properties yielding over 7%. Recently back from london and the vultures are circling especially in the commercial property space. The big big unknown is NAMA and how they are going to behave.


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## oldnick (9 Jan 2012)

-I'm basing my calculations on being the landlord of  a few Dublin city centre apartments over the last few years. 
- 2 months out of twelve per annum is very pessimistic or rotten luck.
- No service charge for me as I look after the small building (not that it needs much looking after). Maybe elsewhere, although a grand a year service charge for a small apt seems a lot unless it includes insurance  which my figures do. 
- I don't even spend 300 euros on decorating(which realy means painting) every year.
- And in the above figure of 3.000 costs I've put in 500 for contingencies plus another 500 in case I've erred. 
- Some of my fellow landlords think that 7.000 to furnish a small apt is too much.

For the sake of accuracy I confess two things which may skew my figures...
1)  I vaguely enjoy getting involved now that i'm retired so ,rather than me spend a fortune on professionals I have  got on my knees with a drain-rod, held a paint brush or a pot of plaster. Being an active participative landlord is not for everyone.
2) I admit that I let other places that yield less than the above figures. Suburban houses in better areas get a lower rental yield than city-centre apts or cheaper houses in working-class areas, but still higher than banking deposit rates. And those houses have not lost much value recently and are reckoned to be the ones with most potential growth, so one wins there.

Look, nothing is certain nowadays but generally for the sharp purchaser willing to do a little work there are investment opportunites in irish properties. 
I repeat - alternative suggestions welcome !


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## Bronte (10 Jan 2012)

Well Oldnick you know what you are at.  And you'e been at it a long time.  I don't know anything about Dublin, but you can rent anything in the city center.  Your figures make sense.  Particularly as you are so self managed and keeping costs down that way and no doubt meeting the tenant's weekly to make sure everything is ship shape.

If you put 120K on deposit at 4% you'd get 4800 less DIRT and you're getting 6000K.  Plus eventually you'll presumably sell the lot and then what will you do with the money?

Rents though will come down for the next while when the social welfare decreases kick in.  But with the lack of investors they will eventually start taking off again.  

Interesting about the suburban houses, that would be family homes?  3 beds ?


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## oldnick (10 Jan 2012)

To be honest Bronte I was putting a good spin on it. I admit to a worry that NAMA will chuck in a hundreds of empty apts, that our economic crisis will worsen,  all immigrants will leave (and they are important to the rental market.). And property taxes will increase.
But I suppose these and other worries can affect other investments. I'm sure the banks will soon stop giving 4% p.a. with the much-forecast ECB interest rate drop.
Anyway, I'm a hands-on landlord and maybe do a bit better than otherswho don't have the time.

About suburban homes -yes mainly 3 beds.  This is the funny thing - and I'll give you a comparison of two neighbouringg suburbs. Palmerston present price -240k  gross rent-14k, Ballyfermot 130k rent 11k. Obviously Ballyfermot produces a much higher yield. Investor cash buyers prefer Ballyfermot, but ordinary buyers ,if they had the money, prefer P'ton as it's considered "nicer".
In parts of Crumlin near the Canal,within walking distance of Dublin,  similar prices and yields as Ballyfermot. One mile further along the canal -north Rathmines-prices of houses are three times higher -but rent is only twice as high.


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