Irish bank interest on overseas apartment

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Daddy

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It was always my belief that if one took out an equity relase on your Irish property to purchase a foreign rental apartment that you could not offset this interest against the rental income.

Is this the case ?

The Revenue booklet states that you can claim interest as a deduction against income on a loan taken out to improve or repair a rental property wherever it is located. The borrowed money must be used to directly purchase, improve or repair the property.

I have an overseas property I purchased with equity release and have received my first year's rental.
There is a double taxation agreement with this country. It is solely a rental property so am I therefore allowed to offset my equity release interest against the income which would be news to me as I was recently contemplating taking out an overseas mortgage on the property (much higher interest rate) so that I could offset the interest in that case against the rental income.
 
It was my understanding from this forum, as this has surfaced before, that you can only offset interest paid in Ireland against rental, wherever the rent arises. If so, the country in which you have the property will ignore the interest you have paid in respect of your Irish equity release and tax you on the rental arising in that country. The Irish Revenue will then have no further interest in the matter because of the Double Taxation Agreement, assuming the Irish tax would not be higher. I take it to mean you should raise a mortgae in the country in which you have a rental property, but then will the Irish Revenue ignore the interest paid in that country?
 
Not quite sure on your reply Slim:

From the Revenue booklet/guidelines:

2.2 Interest relief on loan used to purchase property.

Q Can I claim mortgage interest relief on the loan used to purchase my foreign property?
The loan is secured against my Irish property.

The answer to this basically says that mortgage interest relief via TRS cannot be claimed for interest on a loan to buy a holiday/investment property.
(fine in my sitiation as i have a separate equity release not claiming the TRS)

However, under 2.2 of the guidelines a further question is posed:

Q. Can I claim any relief for the interest paid on the loan used to purchase my foreign property ?

The answer states 'where borrowed money is used to purchase, improve or repair a RENTAL property, the interest payments can be claimed as a deduction against the rental income from that property. The borrowed money must be used to DIRECTLY purchase, improve or repair the property'.


Surely the latter then applies to me ???
 
You can set off the interest against any irish tax liability arising from the foreign rental income but not against the foreign tax liability itself(unless that countrys tax laws allow you to and most(I Think) do not).

In practical terms if your property is in Hungary the rental income will be taxed in Hungary and while it allows some expenses to be deducted mortgage interest is not one of them. After you pay your tax in Hungary you also have to examine your liability in Ireland as your Hungarian tax can be set off against the Irish tax there may not be any tax due here at all but if there is you can use your mortgage interest to reduce it or indeed as the case might be wipe it out entirely.

It very much depends on what country you have invested in but, and I am open to correction on this,say if it was Hungary ,I would not see any tax advantage in you taking out a domestic mortgage there paying higher interest than that you already pay in Ireland. There may of course be non tax related advantage such as protecting yourself against foreign currency fluctuations.
 
Surely if you take out the mortgage in Hungary you can offset the mortgage interest payments against rental income...???
Am I right in saying, if you took out the mortgage in Ireland, then the Hungarian tax system would not allow you to offset the mortgage interest against rental income in Hungary
 
I am saying that you may not be able to deduct the expense of interest payment in both jurisdictions, only in the jurisdiction where the money was borrowed, leaving yourself a larger tax liability in the other. Hope that makes sense and, more importantly, is correct
 
Bop said:
Surely if you take out the mortgage in Hungary you can offset the mortgage interest payments against rental income...???
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No not in Hungary unless(according to another poster on another current thread in this forum) you have bought via a company i.e you have set up a hungarian company and the company has bought the property. If you have bought as an individual you cannot set off mortgage interest even if the mortgage is in hungary.
 
Thanks for replies.

I am now clear that I can offset the Irish interest against the overseas rental income repatriated to here in finalising my tax liability here.
 
Perhaps its not as simple as this, but:
Is it not just a case that as the tax on rental income is 25% in Hungary, and 20% in Ireland (i.e. less, and therefore no tax liability in IRL under double taxation law), then this irish-based mortgage interest will not be called into the equation?
 
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Daddy said:
Thanks for replies.

I am now clear that I can offset the Irish interest against the overseas rental income repatriated to here in finalising my tax liability here.
Click to expand...

This is usually correct. In Bulgaria, as far as I know, 15% tax should be paid on rental income. Because of the double-taxation treaty, you can deduct this from your Irish liability.

After you repatriate the profits to Ireland, you can use expenses such as mortgage interest to reduce your liability here, which could otherwise be as high as 41% (minus the tax already paid in Bulgaria), if you pay income tax at the higher rate.
 
Madangan said:
No not in Hungary unless(according to another poster on another current thread in this forum) you have bought via a company i.e you have set up a hungarian company and the company has bought the property. If you have bought as an individual you cannot set off mortgage interest even if the mortgage is in hungary.
Click to expand...

Thanks for that Madangan.. Just to be clear.. If I purchase as a private individual in Budapest and my rental income is E1,000, if I have an interest only mortgage and repayments are E700,
Is it true to say that I am liable to tax on the full E1,000 (minus furniture wear and tear etc.)...???
 
Established that I can offset the interest against the rental income.

But this taken from the Revenue guidelines confuses me as there's restrictions on the interest:

Q Can I deduct interest from the time that I take out the loan.

You can only deduct interest paid during the period in which the property is let. This means that interest is not deductible:

. for the period following the purchase of the property up to the time a tenant enters into a lease and occupies the property and

. between lettings when you or others occupy the property rent free and

. after the property is let.

I have a 3 year ental agreement with no personal use.
I take this to mean that for the duration of the 3 years - 36 months interest is allowable and thereafter only if I can rent it out.
 
Bop said:
Thanks for that Madangan.. Just to be clear.. If I purchase as a private individual in Budapest and my rental income is E1,000, if I have an interest only mortgage and repayments are E700,
Is it true to say that I am liable to tax on the full E1,000 (minus furniture wear and tear etc.)...???
Click to expand...

There are different (3 i think) ways of paying the tax in Hungary and some allow you to deduct certain expenses ,letting agents fees etc... but none allow you to deduct the interest so in your example if €1,000 is your rental income after deducting all allowable expenses then yes you would pay tax on ,as you put it ,the full €1,000
 
If I purchase as a private individual in Budapest and my rental income is E1,000, if I have an interest only mortgage and repayments are E700,
Is it true to say that I am liable to tax on the full E1,000 (minus furniture wear and tear etc.)...???
Click to expand...

Tax situation as follows:

Tax paid in Hungary will be 250 (25% of 1,000) as detailed in previous post

Tax due in Ireland as follows

Rent ..................1000

Interest....... 700
Wear & Tear 100
Other .........100
...........................900
Profit ...................100
Tax Due 41 % .........41


Less tax already paid in Hungary 250

Nil tax due in Ireland

For more info see [broken link removed] in general and "How are foreign rents taxed" in particular and the link to Irish Tax Implications of Foreign Property Ownership.
 
There are also other ways of paying tax in HU. If paid as regular income rather than rental income, the tax due on lower amounts is less. Your accountant would be able to advise which way of paying tax would suit you best.
 
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