Sell home in negative equity or rent it out.


I don't get your point. If you are salaried and already at the higher rate of tax, then everything in rental will be at around 50%?
 
Butter said:
. This is only good news is house prices are stable or rising though. It's bad news if property values fall.

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Even if they fall, it's a long term investment so it also rebounds. As we see now in the Dublin market.
 

The effective rate doesn't mean anything in this case though, you never calculate tax on new income at an effective rate, marginal rate is what you need to look at. There's no point in telling the OP to calculate tax at his effective rate, which generally will be a lot lower than 50%, when the tax he will be paying is at the marginal rate.
 
Bronte said:
I don't get your point. If you are salaried and already at the higher rate of tax, then everything in rental will be at around 50%?
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A single PAYE taxpayer with total income of, say, €100,000 would have an effective tax rate (including PRSI and USC) of around 40% (the precise percentage will depend on individual circumstances). The effective rate is lower than the marginal rate because a material portion of the income is taxed at the standard rate and because of the impact of tax credits and reliefs. The TASC report linked to my previous post demonstrates the impact at different income levels and I believe Brendan previously posted on the methodologies and assumptions underlying the report.

In any event, it doesn't really matter if the €100,000 in my example is made up of a salary or rental profits, or a combination of both - all elements of income will be subject to the same effective tax rate.

I personally prefer to talk about returns on investments before tax because everybody has a different effective tax rate depending on their individual circumstances. However, paying down debt is obviously tax-free so you need to work out the post-tax return on an alternative investment to compare apples with apples.

Hope that makes sense.

Edited to add a link to Brendan's exhaustive key post on effective tax rates:
http://www.askaboutmoney.com/threads/compilation-of-reports-on-who-pays-what-tax.191864/
 
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Not really.

By way of example, take a married couple where one spouse is over 65 years of age and the couple has a combined income of, say, €20,000. They currently have an effective tax rate of zero because they are below the relevant income threshold. Now say they acquire a rental property (perhaps with a lump sum from an occupational pension) that produces a net rental profit of, say, €10,000 per annum. Their effective tax rate is still zero because they remain under the relevant threshold. They are obviously not paying tax on the new income at the marginal rate.

The same principle applies to all taxpayers at all income levels.
 
Bronte said:
Even if they fall, it's a long term investment so it also rebounds. As we see now in the Dublin market.
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The difficulty is that there is no way of knowing in advance whether any such rebound will occur within the relevant holding period. All we can say for sure is that academic research shows that historically over very long time periods, the real (after-inflation) return on real estate is approximately zero.

When it comes to property, yield is king. Capital appreciation, if it occurs, is simply a bonus.
 

I've marked that report to read later. Of course the total income doesn't get hit by a tax rate of 50%. When you're already at the marginal rate on PAYE income then the technicalities of the tax system don't match how it feels when you do a tax return on rental income. You do lose 50% of the "profit" & that's what you have to hand over. It may not be technically correct but it sure does feel like that.
 
Is the marginal tax rate not the relevant factor here! Ie. Once external earnings are such that the OP is on the higher rate band all additional income will be taxed at marginal rate. Effectively 52% including PRSI/USC.
 

But you're talking in the abstract, rather than in reality. I have a job, I pay the top rate of tax, if I rent out a property, I'll pay tax on any profits at my marginal rate of tax, not my effective rate. The OP has used 50% as his marginal rate because presumably he is paying the top rate of tax.
 
The only tax rate which matters for the decision is the actual tax you will pay on your rental income.

Most people who own investment properties will have a marginal tax rate of 50%. In fact, the tax rate on the rental profits will usually be higher because only 75% of the interest paid is allowed as a deduction.

So the calculation should be expressed in absolute terms e.g.

Rental profit: €10,000
Tax payable: €6,000
Net rent received: €4,000

Is that a good return on the net capital employed? Or can the property be sold and a better return be had?

Brendan
 

Effective rate is of no relevance here.

Marginal rate is what matters.

If my income is €100k per annum PAYE and I'm considering whether to add taxable rental income of €12k into the mix, my marginal rate of 52% is all that matters. That's what the rental income will be subject to - Income tax at 41%, USC at 8% and PRSI at 4%.
 
Using Sarenco's 33% expense assumption it seems like I would need to add >€13k per year to this mortgage so it seems like it makes sense to sell.
I wonder would it be better to keep for a few years until it returns to positive equity?
 

In addition one has no choice about a job, you have to work, but you don't have to have an investment property. So when considering buying one what tax rate you will pay is what is relevant. Being 53% for most people.
 
Sarenco said:
When it comes to property, yield is king. Capital appreciation, if it occurs, is simply a bonus.
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Can someone explain to me what "yield is king" means? I gather that property is a bad investment and that you are just breaking even when you sell because of inflation?
 
Hi,
Just wanted to resurrect this for some additional questions/discussion.
We had hoped to have started the new build by now but based on some discussions have some things to consider first.
What is the most efficient way to approach this?
If we feel that it’s best to sell the house in Dublin even with negative equity is it better to try and sell this before starting our new build and paying the shortfall from savings (probably about 50k)? This would probably delay the build by about a year, and also increase the amount we need to borrow at the higher rate. Or do you think it’s best to start the build and at the same time put the house up for sale and add negative equity to the new house mortgage. Is this even an option in practice?
To give some additional information, House 1 is in Dublin, house we are building is in North Wexford, close to family and friends. Work is in Dublin so we are adding a major commute to our lives but will both work from home at least two days each per week. Having lived outside of the country for a number of years we want our children to spend time close to family and grandparents.
Reasons to keep the house in Dublin
· Fall back plan in case we need/prefer to move back to Dublin
· Capital appreciation/ erode negative equity
Reason for selling the house in Dublin
· Avoid the hassle of being a landlord
· Can focus paying down one mortgage
· Risk of financial pressure (in case of one/both job loss)
Thanks for any advice.
 
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