Investment Property / taxable income and interest relief

Hi All

I have recently bought a 2nd hand home that is now my primary residence. I am now renting out my original house. Couple of questions using some example figures.

I originally owed €50,000 on my mortgage for the first house.
I took out a new mortgage and bought the 2nd house (my new home) using some of the equity from the first house. I used all of the money borrowed to pay for the new home and to cover the stamp duty on it.

I now have 2 mortgages. These are:

€250,000 owed on my new house (my primary residence)
€300,000 owed on my old house (that I am currently renting out. This is an "interest only" investment mortgage)

Q.1. I know that I can only claim mortgage interest relief on the 2nd house but can I claim it up to the full value of €250,000 considering I used some money to pay for stamp duty.

Q.2. When working out my taxable rental income on the investment property, can I offset "all" of the interest being paid on the €300,000 mortgage against the monthly rental income? e.g. if the interest was €1,000 p/m and the rental income was €1,200 p/m, do I only pay tax on the €200 (I know that there can be other reductions 12.5% maintenance etc.)


I'd really appreciate any help on this matter.

McGinty

Interest allowable on first house - now rented out will be restricted to the funds actually used to purchase or improve this house. Therefore likely to be limited to the interest on the original loan of €50K.

Yes - that's correct. Only interest used to purchase/renovate the investment property is allowable against rental income. It's not what property a loan is secured on but what the money is used for that matters. For example equity released from the first (now rental) property to buy your new home is not allowable against rental income - only interest on the original €50K outstanding. You should get independent, professional advice on getting your tax returns done correctly.

Firstly, thanks for the quick reply but I have only just picked myself up off the floor because I'm in that much shock. I'll definitely get some advice on this but I'd be interested to hear your opinions.

In relation to Q.2., I am paying interest on a mortgage of €300,000 on the rental property. If the only interest that I can offset against the rental income is the equivalent interest that I would have been paying on the €50,000 mortgage, I will be paying a lot more income tax. In fact, assuming that the usable interest amount is €300, then (very roughly):
€1300 rental income - €300 offset interest = €1000 that I pay tax on which would be practically €400 per month.

Therefore, the house is costing me €1400 per month to have but the income I am getting on it is only €1300 PLUS I now have a much bigger mortgage on my new house. So basically I am losing my <beep> on this??

Another quick question on Capital Gains Tax. If I bought my original house for €100,000 and now decide to sell it for €400,000 (to get me out of my new financial predicament), do I pay capital gains tax on the €300,000 difference OR do I pay it on difference between the remortgage value of the house and the €400,000???

Please help a panicing man!!!

McGinty

On the first point - loan interest on investment property - in the UK it was agreed that if the original cost of the property was say 100K and initial mortgage was say 50K (balance paid from cash), the UK Revenue would allow interest on re-mortgages up to the initial cost of the house.

I have not seen this point raised here in Ireland, but perhaps it could be argued in the same manner. However, no guarantee on this.

Perhaps in your case if original mortgage was €50K, but cost of property €100K you could claim interest on this amount (€100K) - however, would need to research this point further to clarify.

With regard to CGT - the gain is the proceeds less the cost (mortgage has no relevance), less legal fees, and indexation may apply depending on lenght of ownership. Note that period of PPR is exempt (as is last 12 months), so may be no CGT.

I would suggest that you get professional advice.

Yes, the rules in this area are certainly complex and I agree with the previous posters that it is imperative you seek professional advice on this one. By careful planning with the PPR election (which is a precursor to getting the PPR relief) it may still be possible to make significant tax savings on a disposal, but it is important to plan the disposal. In particular, in England, it is possible to notify the tax office that a property is to be classed as a main residence from any date up to 2 years prior to the date of notification! I am just looking for an article I read on this subject not too long ago, and when I find it I will quote you the example it gave, which made interesting reading!