Do institutional landlords pay less tax than private landlords?

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NoRegretsCoyote

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There was some debate on this thread so I decided to do a worked example. Let me know if any assumptions wrong.

Assumptions: Rental portfolio of €1m with pre-tax yield of 5%. Individual can either hold directly (private landlord) or buy equivalent shares in a REIT that trades at book value for simplicity.

Resident landlords
Private LandlordInstitutional landlord
Rental profit€500k€500k
Distributed profit (>85% for institution)€500k€500k*85%= €425k
Corporation tax 0%€0€0
Taxable profit€500k€425k
Personal tax @52% marginal rate€260k€221k
After tax income€240k€224k
CGT 33%Applied to capital gain on propertyApplied to capital gain on share price (gains within the REIT exempt)

I can't see any major advantage in tax treatment here. There is no corporation tax in either scenario but the REIT has to distribute a minimum of 85% of profits to shareholders. If the REIT retains the 15% it can keep as cash or invest in further properties. So over the long run this should increase the book value of the REIT and any gain to shareholder will be taxed at 33% rather than 52% as income.

Revenue guidance on REITs here.
 
And now a worked example for non-residents. The main difference is that non-resident private landlords are taxed at 20% and REIT distributions to non-resident shareholders are taxed at a 25% withholding tax.


Non-residents
Private LandlordInstitutional landlord
Rental profit€500k€500k
Distributed profit (>85% for institution)€500k€500k*85%= €425k
Corporation tax 0%€0€0
Taxable profit€500k€425k
Withholding tax (20% for private landlords, 25% for institutions)€500k*20%=€100k€425k*25%=€106k
After tax income€400k€319k
CGT 33%Applied to capital gain on propertyApplied to capital gain on share price (gains within the REIT exempt)

The private landlord does a good bit better here but of course a lot depends on tax treatment of foreign rental income and REIT distributions in their country of residence.


Any comments/clarifications on these worked examples welcome! If I've made an error I'll adjust and note it.
 
Hi Coyote

I thought that some of the international institutional investors were registered as charities and so they paid no tax?

But you raise an interesting point. A REIT may pay no tax, but the individual shareholder does pay tax.

If they abolished the REIT treatment, then property investment would be done by ordinary companies and the shareholders would pay tax twice. The purpose of the REIT was to allow individuals invest in property units on the same basis as individuals buying their own properties.

Brendan
 
Brendan Burgess said:
I thought that some of the international institutional investors were registered as charities and so they paid no tax?
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I think this more related to purchasers of distressed debt, and I think the loophole was closed at the end of 2016:

Minister for Finance Michael Noonan has signalled that he plans to bring forward measures in the upcoming Finance Bill restricting so-called vulture funds' use of tax-efficient fund structures to hold property.

....

In his Budget 2017 speech, Mr Noonan noted how he moved last month to clamp down on the use of special purpose vehicles, or section 110 companies, by private equity firms to hold property loans acquired in Ireland during the financial crisis. SPVs are typically designed to produce little or no taxable income on assets held in these structures.
Click to expand...

I have read the Revenue guidance on REITs and it seems pretty straightforward for firms who make the bulk of their income from rental property in Ireland.

Brendan Burgess said:
If they abolished the REIT treatment, then property investment would be done by ordinary companies and the shareholders would pay tax twice. The purpose of the REIT was to allow individuals invest in property units on the same basis as individuals buying their own properties.
Click to expand...
Indeed that was the rationale, yes. The question often comes up on AAM "should I buy this property through a company or hold it personally?" and the answer is always to hold it personally.
 
This is just the Sinn Fein/IRA agenda and misinformation at play again.

REITs are DESIGNED to be tax neutral!

They’re a means to democratise property investment and to allow “the little guy” to invest smaller amounts (e.g. €5,000+) and get exposure to property as an asset class but with the diversification of owning hundreds or indeed thousands of properties.

It makes perfect sense for the tax charge to arise at shareholder level. So if I make a gain on shares in REIT, it’s taxed at 33% and if I get a dividend from a REIT, it’s taxed at my marginal rate. The whole exercise is meant to simulate “real” property investment and make it more accessible for the individual.

Sinn Fein/IRA’s Budget 2023 document provides for 33% tax on gains at REIT level, which makes no sense based on the above.
 
If they really are tax neutral, and expose the investor to more tax as detailed above, why are there so many REITs with foreigner investors with huge amounts of money involved? Surely they would have just gone after more tax efficient stocks with their long term dividend rates?
 
Sinn Fein/IRA and the rest are gas. As a nation we were desperate for capital when the banks were bust. REITs are everywhere to allow the little guy access property investment. Populist tripe!
 
Gordon Gekko said:
This is just the Sinn Fein/IRA agenda and misinformation at play again.

REITs are DESIGNED to be tax neutral!

They’re a means to democratise property investment and to allow “the little guy” to invest smaller amounts (e.g. €5,000+) and get exposure to property as an asset class but with the diversification of owning hundreds or indeed thousands of properties.

It makes perfect sense for the tax charge to arise at shareholder level. So if I make a gain on shares in REIT, it’s taxed at 33% and if I get a dividend from a REIT, it’s taxed at my marginal rate. The whole exercise is meant to simulate “real” property investment and make it more accessible for the individual.

Sinn Fein/IRA’s Budget 2023 document provides for 33% tax on gains at REIT level, which makes no sense based on the above.
Click to expand...
Gordon where did you get your information on the IRA agenda was it from the army council:cool:
Tiocfaidh Ar La:p:p
 
ryaner said:
why are there so many REITs with foreigner investors with huge amounts of money involved?
Click to expand...

This is a very interesting point.

It's perfectly right that REITs should be taxed as they are for Irish tax residents as the tax treatment is effectively the same for people who invest directly in property.

But does it allow non-residents to invest in Ireland tax-free?

If an investment company in the UK invests in an Irish REIT I presume that they pay no tax in Ireland? If they buy a property directly, they would pay Irish tax?

Brendan
 
Brendan Burgess said:
But does it allow non-residents to invest in Ireland tax-free?
Click to expand...
Not tax free, as distributions subject to a DWT of 25% .

It depends on country of residence but usually this can be used as a credit against liability in country of residence.

But even if you live in Monaco or something you can't avoid the 25%.

A 25% rate is higher than an Irish-resident landlord with low rental income and no wage income would face.
 
www.businesspost.ie

Reason for dramatic fall in taxes paid by Irefs ‘yet to be identified’

A review by the Revenue Commissioners into the sharp decline in taxes paid by Irish real estate funds will not be completed until late 2023
www.businesspost.ie www.businesspost.ie
The measures to clamp down on tax avoidance by Irefs were introduced as part of Budget 2020. Immediately following their introduction, the tax paid by institutional investors rose by 171 per cent to €65.7 million on a taxable amount of €369 million, an effective tax rate of 17.9 per cent in 2020.

New data released by the Revenue has shown that the effective tax rate has fallen to 5.9 per cent after Irefs paid €36.8 million tax on a taxable amount of €621 million in 2021.
Click to expand...
Irefs are generally subject to a 20 per cent withholding tax on the occurrence of what is deemed a taxable event. Such a taxable event can be defined as any way in which the value of the profits of the Iref are passed onto a shareholder, including a relevant payment that is akin to a dividend. The Iref taxable amount is the profit element of that payment.
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I think the changes introduced in 2020 tightened up how debt and interest was allowable against profits, which caused the increase in taxable receipts.
 
Brendan Burgess said:
Hi Coyote

I thought that some of the international institutional investors were registered as charities and so they paid no tax?

But you raise an interesting point. A REIT may pay no tax, but the individual shareholder does pay tax.

If they abolished the REIT treatment, then property investment would be done by ordinary companies and the shareholders would pay tax twice. The purpose of the REIT was to allow individuals invest in property units on the same basis as individuals buying their own properties.

Brendan
Click to expand...
They aren’t investing on the same basis at all, REITs have been a dreadful proxy for the housing market

The yield is decent on the only exclusively residential REIT here but those who bought day one in 2014 have seen almost no capital gains
 
ryaner said:
If they really are tax neutral, and expose the investor to more tax as detailed above, why are there so many REITs with foreigner investors with huge amounts of money involved? Surely they would have just gone after more tax efficient stocks with their long term dividend rates?
Click to expand...
Probably because they have suffiicient leverage to borrow more.
 
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