# Two properties: What's the best tax position?



## Dinarius (2 Jun 2005)

We are about to buy a semi-d and let the apartment that we have been living in for the last 10 years.

The apartment is worth about €330k. Our mortgage on it is exactly €100k.

To buy the semi-d we will have to take another mortgage of about €200k.

So, our total borrowings will be about €300k.

We will let the apartment for about €850 per month, netting about €10k per annum on which we will have to pay tax at the top rate.

We could borrow up to 92% of the value of the apartment, a total of about €300k. This would mean that all our borrowings would be against the apartment and the house would be mortgage free. We have been advised that this is the best course of action from a tax point of view. i.e. Maximize the borrowings on the apartment in order to minimise the tax bill, since mortgage interest relief is now so poor that there is little point in borrowing against the house.

The downside of this is that we would be above the 60% level allowable for a tracker rate, so we would be paying the current variable of around 1.25% instead of a guaranteed 1% over ECB prime for the duration of the mortgage. So, we trade off a better lending rate for a smaller tax bill. Or, so the theory goes..............!

Does this course of action make sense? Anyone got a better suggestion? I would be grateful for any advice.

Many thanks.

D.


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## RainyDay (2 Jun 2005)

Have a read of the Sell home or keep as investment key post.


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## Lemurz (3 Jun 2005)

My gut feeling would be to max out borrowing on your rental property, as any interest is offset against your rental income at the top rate.

Interest on your PPR is only allowable at the standard rate, and subject to certain limits.

BTW - NIB (ECB+.79%) / Ulster (ECB+.85%) offer the best tracker rates and also may cover your legal costs.  Talk nicely to your broker and you might even get a share of his commission!


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## Sarah W (3 Jun 2005)

You can only offset the interest on monies use to "buy, improve or renovate" the investment property against the rental income so only the interest on the current €100,000 could be offset.

Sarah

www.rea.ie


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## Dinarius (3 Jun 2005)

Sarah W said:
			
		

> You can only offset the interest on monies use to "buy, improve or renovate" the investment property against the rental income so only the interest on the current €100,000 could be offset.



Hhhhhmmmmmmm...............

Sarah,

That makes it a trickier decision. If I am not allowed to benefit from the additional €200k on the apartment, then I might as well have it on the house, even if it is only allowable at the standard rate. Correct?



Lemurz, 

Yes, I am aware of those tracker rates, but as I wrote above, if I put everything on the apartment, I won't be eligible for them.

Any other suggestions welcome!

Many thanks.

D.


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## Dinarius (8 Jun 2005)

Just spoke to my accountant again and to another financial consultant.

They are both adamant that deductions can be made on the interest on the entire €300k and not simply on the €100k outstanding on the apartment at the moment, if we borrow the lot against the apartment.

Makes that route the only way to go, in my view, since mortgage interest relief is going only one way in the future and that's down.

Best to reduce the tax bill on the rental income from the apartment as much as possible.

D.


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## ubiquitous (8 Jun 2005)

Your accountant and consultant's advice appears to be wrong. Get it in writing.


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## MissRibena (8 Jun 2005)

I looked into doing this when selling my old house and sought to maximise lending against the "old" house which I was intending to rent out.  In the heal of the reel, the advice other posters are giving here was what I found to be the case and would definitely worry about your accountant's/consultant's advice.

I didn't go ahead because I believe it's only a matter of time (i.e. the next time the government get stuck for dough) before the revenue start looking more closely at this and before you know where you are you are talking telephone numbers in  penalties and interest.

Rebecca


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## Dinarius (8 Jun 2005)

MissRibena said:
			
		

> I didn't go ahead because I believe it's only a matter of time (i.e. the next time the government get stuck for dough) before the revenue start looking more closely at this and before you know where you are you are talking telephone numbers in penalties and interest



Rebecca,

I am not sure what you mean by this. 

Mortgage interest relief is only going to fall in the future or, at best, stay the same. So, it would seem that placing the maximum debt, where one would otherwise be liable for the most tax, is the logical course

No?

Thanks.

D.


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## MissRibena (8 Jun 2005)

Ok maybe I haven't followed what you're intending to do.  

What I understood is that you are going to organise a mortgage on your current appartment to cover the balance of the appartment and the buying of the new house.  Then use the interest on this mortgage (effectively covering both properties) as a deductable expense against the rental income from the appartment/original property in order to minimise the tax you pay on this rental income.  

I was told that this is not correct as you are only entitled to deduct interest from a mortgage/loan used to buy or repair/improve the property you are renting out.  The proportion of interest that relates to the new property (in which you intend to live) is not allowable against the rental income and this is something that could/will come back to haunt you at a later date.  You would have to investigate how/if you could claim some tax relief on the PPR interest in the normal manner but this tax relief would not be as much as the more desireable (but incorrect) route of offsetting against the rental income.

IMHO it would be naive to think that you could hide/ignore this forever, if the revenue's ways of dealing with other tax avoidance issues are anything to go by.

Rebecca


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## Sarah W (9 Jun 2005)

Dinarius said:
			
		

> Just spoke to my accountant again and to another financial consultant.
> 
> They are both adamant that deductions can be made on the interest on the entire €300k and not simply on the €100k outstanding on the apartment at the moment, if we borrow the lot against the apartment.
> 
> ...



They are 100% incorrect - it's worrying that your accountant is totally ignorant of what is pretty basic information.


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## MM3 (9 Jun 2005)

Hi Dinarius,

I was in a similar position to you and approached my accountant regarding the tax position if I increased the mortgage on what was my PPR and converted it to a rental property. His advice was along the lines of Rebeccas i.e. that only the 100k would be allowable for interest relief. He also told me that he was aware that a lot of people were assuming they could just write off the extra mortgage interest. His advice (which I took) was to sell my PPR, buy an investment property and mortgage it to the hilt - then there is no amibiguity about the tax position, as Rebecca said given the efficiency of our tax authorities it will probably take then 10+ years to get round to checking this stuff out and you might end up owing so much that you'll be end up handing them the keys to the house..

M


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## Dinarius (9 Jun 2005)

I spoke to my accountant again today.

He said that, while strictly speaking, putting the additional €200k on the apartment instead of the house does not make it eligible for deductions, the reasoning runs something like this:

You are buying a new house, but you want to keep the old one. This necessitates borrowing €200k that you wouldn't otherwise have to do. So, you borrow the money, but do so against the old house and not the new one.

The key to this is that you do so AT THE TIME OF PURCHASE OF THE NEW PROPERTY. In other words, that €200k is demonstrably for the purchase of the new house and not for anything else. 

The underlying logic here is that you can argue, "OK, if you insist that I can't avail of deductions on this €200k if it's set against the old house instead of the new one (where it patently would be eligible) I'll switch it to the new one." Clearly, this wouldn't wash if you decided to borrow against the apartment some time after purchasing the new house.

1. Obviously, this is an interpretation of the existing legislation. My advisers say that they have never had a problem playing it this way. You ARE entitled to deductions on the €200k. You are simply availing of them against one property rather than the other. 

2. The difference in benefit is very small and depends on a few factors. a. What you are getting in rental income on the apartment. b. What rate you pay if you borrow the entire €300k against the apartment or, c. What rate applies if you borrow €100k on one and €200k on the other. e.g. Would getting tracker rates on two smaller loans be more beneficial than paying a higher rate on €300k? etc...etc... 

We still haven't decided which way to play it. The real benefit comes if mortgage interest relief is reduced over time. Against that, having N.I.B's 2.79% tracker on both properties is VERY tempting.

D.


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## MissRibena (9 Jun 2005)

You are codding yourself from a tax perspective.  What might seem like a small difference will snowball when the revenue start digging.

If it was that easy, we'd all be at it so don't say you weren't warned.

Rebecca


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## Dinarius (9 Jun 2005)

Thanks for the advice. Not sure if you understood my last post. I have no intention of breaking the law. It's a question of interpretation. 

On a €300k outlay, the difference between splitting the loans and loading the apartment is about €1000-1500 per annum, at best. This assumes a good rent on the apartment and maximising the occupancy.

Against this, as I wrote above, is the temptation of two low interest trackers.

A difficult decision.

D.

Edited: Just spoke to NIB. They won't do two trackers. The second loan would be at 3.01%.


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## ubiquitous (9 Jun 2005)

Is this a troll? Otherwise your advisors must be extremely brave, not to mention foolhardy! The tax treatment on this point is not a matter of interpretation as you contend. The law is quite clear and has been reinforced by repeated and unequivocal Revenue statements. If you ignore these, you are setting yourself up for the prospect of future tax problems and your accountant and financial consultant are setting themselves up for the prospect of future malpractice cases.


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## Kilkenny Tax (9 Jun 2005)

The law is not entirely clear and that is the reason why Revenue have provided guidance in this area.

The most relevant piece of advice is contained in pages 13, 14 and 15 of Tax Briefing 50 - [broken link removed]


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## Dinarius (9 Jun 2005)

Many thanks for the link.

I spoke with AIB this afternoon. They suggested borrowing an extra €100k and paying off the loan on the apartment. 

They reason that by putting the full €300k against the house @ 2.75% fixed in year one, followed by a 2.95% tracker (assuming current rates) thereafter, in addition to our mortgage interest allowance, we would be better off. 

They argue that structuring it this way would more than offset any loss incurred by not having an apartment loan against which to make deductions on our rental income. Particularly so since the rate on that loan would be less competitive than the tracker loan.

On balance, this seems to be the way to go. My accountant seems to agree.

Thanks for all the advice.

D.

Edited: Contrary to what I wrote above, we would still be entitled to deductions on rental income tax on the apartment loan. We are, of course, merely moving the €100k on the apartment from EBS to (relatively) cheaper AIB.


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## Dinarius (14 Jun 2005)

Only now had a chance to print off and read the Revenue document that was linked above.

Very interesting. 

Whatever qualms people have about borrowing against the rental property in terms of interest relief, it seems to me that borrowing the lot against the new house is the way to go.

a. The entire loan (€300k in our case) is eligible for the tracker rate.

b. €200k of the €300k is eligible for mortgage interest relief.

c. Tax on rental income from the apartment can be reduced  by being offset against the interest paid on the remaining €100k.

Effectively, a triple whammy since the benefit of the tracker rate was not an issue in the first permutation.

Page 14 of the link dealing with "Amalgamation of loans..........." seems to me to be the key:

"........interest on amalgamated borrowings....will qualify for relief where:


.....each rented residential property can readily identified and traced back to the original borrowings and............

Borrowings were amalgamated for genuine commercial reasons (e.g. the pursuit of a more competitive interest rate, as mentioned earlier in the same article) ......and not the avoidance of tax."

Is this a complete no-brainer, or am I missing something? 

While I won't be availing interest relief against rental income on the entire €300k, I will be availing of a lending rate far lower than the current buy-to-let rates on the €100k on the apartment. Killing off the existing apartment loan with EBS and moving to AIB seems to be the way to go.

I would be interested to know why those who posted above that they had been in a similar situation, didn't pursue this option? Or maybe you did?

Thanks.

D.


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## ClubMan (14 Jun 2005)

For what it's worth this topic explains why it might be a good idea in some or all circumstances to raise an interest only mortgage against rental property.


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## ubiquitous (14 Jun 2005)

Dinarius said:
			
		

> Page 14 of the link dealing with "Amalgamation of loans..........." seems to me to be the key:
> 
> "........interest on amalgamated borrowings....will qualify for relief where:
> 
> ...


The above seems to refer to a situation where a property owner amalgamates a number of loans where the proceeds of each of the original loans were used to purchase extend or improve a rental property. 

What you are proposing is different in that you are buying a PPR with some of your mortgage proceeds - at least that's my understanding. Am I correct?


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## Dinarius (14 Jun 2005)

Clubman,

Many thanks for the link. Will look into it.

ubiquitous,

You are correct. 

But, the example given on p.14 of the link refers to a mixture of PPR and investment/rental property.

My reading of the piece is that you have to provide an adequate paper trail to each of the loans. No problem there.

I don't see that having one of them for my PPR precludes anything, but I could be wrong.

D.


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## Dinarius (15 Jun 2005)

Clubman,

Many thanks for the link. It makes sense if one could be sure of finding a home for the capital repayment money that was guaranteed to at least breakeven. If you know of one, please let me know! ;-) Seriously, I may yet go that route.

AIB said that they will set up two seperate loans against the house (€100k and €200k) so that a crystal clear paper trail is available to my accountant and the revenue commissioners when it comes to claiming the various reliefs. Both loans will be at tracker rates from year two and 2.75% in year one. Not bad!

D.


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## ClubMan (15 Jun 2005)

Dinarius said:
			
		

> It makes sense if one could be sure of finding a home for the capital repayment money that was guaranteed to at least breakeven. If you know of one, please let me know! ;-)



There are a few deposit accounts which I believe currently match/outpace inflation (even after _DIRT_) and so are arguably breakeven. However deposit accounts are usually not the most appropriate long term savings/investment vehicle.



> AIB said that they will set up two seperate loans against the house (€100k and €200k) so that a crystal clear paper trail is available to my accountant and the revenue commissioners when it comes to claiming the various reliefs. Both loans will be at tracker rates from year two and 2.75% in year one. Not bad!



I'm surprised that they are not loading the rate on the investment property to take account of the higher potential risk of default. Does anybody know if this is common (to charge home loan interest rates on investment loans)?


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## stuart (15 Jun 2005)

Some bank are more than happy to charge PPR rates for property investment

Sometimes depending on loan>equity ratios and sometimes for new business/long established clients

For the cases above they see the higher exposure as less of a threat

stuart@buyingtolet.ie


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## Dinarius (15 Jun 2005)

ClubMan said:
			
		

> I'm surprised that they are not loading the rate on the investment property to take account of the higher potential risk of default. Does anybody know if this is common (to charge home loan interest rates on investment loans)?



Clubman,

First of all, the loan is against the house not the apartment, so I guess they're covering themselves that way. There is about €650k equity in the house and about €250k in the apartment. As the manager I am dealing with said, "This is a no-brainer for us." Worst case scenario, he knows that the apartment is our get-out-of jail card.

What surprises me is that people take these things as unalterable. I *always* haggle! Money is a product, just like anything else. I never pay the going rate for anything, if I can help it.

On the subject of deposit accounts, I have just mailed an application to Northern Rock. 3.05% is just too good to turn down.

D.


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## ClubMan (15 Jun 2005)

Dinarius said:
			
		

> First of all, the loan is against the house not the apartment



But how then are you expecting to be able to offset mortgage interest against rental income if the mortgage is not secured against and used to purchase the investment property?!


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## Dinarius (15 Jun 2005)

ps.............I have to say, I have always found AIB to be a seriously impressive outfit. They act like they're doing business rather than just playing at being bankers, if you know what I mean. They approach things creatively, not at all by the book. 

And I am saying that as someone who has no personal connection with them. I don't even have my current or business accounts with them!  

D.


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## Dinarius (15 Jun 2005)

ClubMan said:
			
		

> But how then are you expecting to be able to offset mortgage interest against rental income if the mortgage is not secured against and used to purchase the investment property?!



Read the link to the revenue site! ;-)

D.


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## ClubMan (15 Jun 2005)

Oh - sorry, I wasn't paying attention earlier... Are you getting independent advice/confirmation that your planned approach is kosher - just in case?


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## Dinarius (15 Jun 2005)

My accountant (the best tax wizard I have ever met) and the tax heads in AIB's lending department, both came back to me with identical advice which concurs with (my reading of) the Revenue article.

For the record, AIB said that splitting the loan isn't really necessary, but they would do it, at no extra charge, in order to clarify the paper trail.

On p.14 it says that "The amalgamated loan will be treated as if it were three seperate loans........." Obviously, that would be two in my case, but even that won't be necessary now.

On the same page (top of column three) "It is not necessary that the security offered is the premises which is let............"

And why should it be? The only point at issue, surely, is that the €100k (in my case) was used to purchase the apartment and nothing else. Security is the bank's concern, not Revenue's. At least not here.

D.


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## Dinarius (19 Jul 2005)

For the record and in case it might be useful to someone else with an investment property:

In the end we went with the AIB offer. 

We borrowed €200k towards the purchase of our new house and an additional €100k to close out the EBS mortgage on our apartment and transfer it to AIB.

Two seperate loans have been setup in order to provide a clear paper trail back to the apartment for the purposes of tax deductions on future rental income.

The entire €300k is secured against the house.

Because we are deemed new business, the entire €300k benefits from the 2.75% one year fixed rate, notwithstanding the fact that the apartment is an investment property.

After one year the entire €300k will switch to AIB's tracker mortgage rate, currently 2.95%.

Ask and you shall receive, as they say! ;-)

D.


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## Purple (19 Jul 2005)

Hi Dinadius,
That is the way I did it a few years back with a house that was my PPR that was being rented out and a new house that was my new PPR. One loan from First Active for the lot and the interest on the portion of the mortgage outstanding on the investment property used to offset against rental income. Revenue and my accountant are happy with the arrangement. 
I also agree with you about haggling on interest rates; BOI are giving me their homeowner discount rate on another investment property at the moment. When I told them that I would close all accounts and move to another bank they played ball.


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## Dinarius (19 Jul 2005)

Purple said:
			
		

> When I told them that I would close all accounts and move to another bank they played ball.



I am not surprised, but well done anyway.

People can think that bank's are doing them a favour (make no mistake about it; in the case of some people, they are!) and that they must tick all the boxes in order to succeed. Cobblers!

Buying money is like buying anything else. Never, ever pay the going rate without haggling first.

Your success is only superficially based on correctly answering all the questions on the application form. Credit history, job security, loan security and your relationship with your bank manager are far more important.

D.


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