Crystallize Property Losses and Start Investing in Shares

[ronaldo]

I've been looking into this after the budget as I have a rental property that's reduced in value by about 60% from initial purchase price.

Anecdotally, I'm hearing people talk about sitting things out and waiting for price rises. The problem is, it'll be a long, long time before prices reach peak levels on a nominal basis.

A cousin invested in property around the same time. The difference between him and I is that my property is on a cheap tracker with 24 years remaining. With this in mind, and ONLY for this reason, I am keeping the property.

I've advised him to look into the option of selling the property and having significant capital losses to be swept up with gains in shares over the next few years. Basically, a lot of CGT free investment income due to our past, bad investment decision.

Are there many people doing this at the moment? I suppose a lot of people can't due to negative equity. However, there's bound to be some, for example, professional landlords who bought property right through the past 10-15 years and could do with diversifying a bit away from property having learned their lesson. Perhaps it's a no-brainer for them to sell the property(ies) purchased at the peak if they have significant gains in shares.

 

[dub_nerd]

The main thing I'd worry about is whether there is an artificiality about the current values of shares precisely because of the phenomenon you mention (and I don't mean in Ireland necessarily) -- investment money chasing returns when other asset classes (cash, property, government bonds) have been a damp squib. Also, cheap money is available for this investment because of Q.E., which must end some time. What sort of reset in valuations might that trigger?

 

[Brendan Burgess]

Hi Ronaldo

Very interesting question, and could make a very good case study if your cousin wants to do a Money Makeover. Here are some considerations. They are not in any systematic order as it's not possible without knowing the full financial situation of your cousin. Even then, I doubt if the answer would be clear.

1) Tax planning is a very good activity, but don't let it rule your investment decisions.
2) Diversifying your investments is a good idea. So if you are over-exposed to property, then investing in shares is useful diversification.
3) While you can carry CGT losses in property forward against gains in shares, this might not always be the case. Carrying forward of losses might be limited in some way. By keeping the property, you are very unlikely to ever lose the tax value of the "losses" to date.
4) The property investment should primarily be judged on its own merits. What is the current value of the property? Does the rental return justify it?
5) Does he have borrowings against the property? If he is selling the property to repay loans, then he is unlikely to be able to get capital gains from investing in shares. If he is selling for cash, he can re-invest in shares.
6) Most investors in property do have loans on, at least, some of the properties. The safest long-term strategy is to repay those borrowings. I agree that the risk/reward favours keeping trackers on investment properties, if you can handle the risk.
7) If you have borrowings at SVR on some properties, you should not be selling a mortgage-free property to invest in shares. By doing so, you are effectively borrowing at SVR to invest in shares. This is very risky. Even if you are getting tax relief on 75% of the interest.

 

[cremeegg]

...professional landlords who bought property right through the past 10-15 years and could do with diversifying a bit away from property having learned their lesson...

What lesson are they supposed to have learned.

I would think these people have nicely profitable rental businesses.

The capital values maybe down from the peak, but that is not of huge concern to a landlord. After all the point of being a landlord is to make profit through renting properties.

On the other hand getting caught up in the latest investment fad is a sure way to lose money, the latest tax scheme even worse.

 

[Brendan Burgess]

On the other hand getting caught up in the latest investment fad is a sure way to lose money, the latest tax scheme even worse.

Hi cremeegg

What is wrong with the latest tax scheme? Do you mean the 7 year CGT exemption? It looks like a great incentive to invest in property. I agree with avoiding fads and I never liked the various Section xx schemes, but his one seems different. Maybe it's not.

 

[cremeegg]

Hi Brendan,

I meant the idea of selling property to create tax losses as proposed by the OP here. I think thats is a faddy idea and not seriously to be considered.

The 7 year CGT exemption is great and while not a reason in itself to purchase property it could be a very welcome relief at a future date.

 

[ronaldo]

Hi Brendan,

I meant the idea of selling property to create tax losses as proposed by the OP here. I think thats is a faddy idea and not seriously to be considered.

The 7 year CGT exemption is great and while not a reason in itself to purchase property it could be a very welcome relief at a future date.

In my opinion, this is far from a fad. A 'faddy idea' generally means something that the masses think is a good idea but, on further analysis, it doesn't turn out to be as prudent as one might have first thought.

If one is not in negative equity and feels that the returns on equities will outperform the returns on property over the next few years, how could investing in equities with the advantage of capital losses to be offset against the gains in equities be considered a bad idea?

Take, for example, the DAX index. It was at a low of 3,695 in 2009. Since then, it has rose 145% to 9,046. Obviously, past performance is no guide to future returns but someone would have done very well to crystalise a loss in Irish property in 2009, or at any time since then, and invest their money in the DAX market.

The future may be very different but to simply write off the idea of it as "not seriously to be considered", in my opinion, would be a bad idea.