Tax on Investment property in Hungary

A friend of mine has an investment property in Budapest.

It was 100% financed by equity release from his apartment in Dublin.

He is losing money on the Hungarian apartment monthly.
The nett rental income does not cover the loan interest he took out to buy the apartment.

He is paying tax on the property to the Hungarian exchequer at 25% on the gross rent, the agent looks deducts it from the rent received.

Should he be paying tax to Hungary considering he is losing money on it every month ?

I understand he can elect to submit a tax return, if he does, is the interest on the mortgage procured in Ireland deductable ? If it is deductible, he will show a loss, the mortgage interest is the main cost regarding the purchase.

Re: Tax on Inverstment property in Hungary

There are a few threads on this. If you search "Budapest Tax" on this forum you should find answers to these questions.

Re: Tax on Inverstment property in Hungary

Perplexed said:

There are a few threads on this. If you search "Budapest Tax" on this forum you should find answers to these questions.

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I can't find an answer to my question despite looking for the past 1/2 hour !! I'll dig around a bit more.

Re: Tax on Inverstment property in Hungary

Where in Budapest did he buy an apartment, where he is only making a 3% return?

It doesn't matter how he financed the loan to buy the property, he still needs to make a return in Hungary, as a profit is being made in this country. The fact that he is making a loss in Ireland is only of interest to the Irish revenue. He will more than likely only have to make a 0% return in Ireland, but he would still need to go through the process of calculating this, using the tax already paid as a deductable expense, due to the double-taxation agreement. He should also be entitled to make further deductions in Ireland, such as mortgage interest, etc.

This system is the more or less the same in any overseas country, where a double-taxation treaty is in place and is not exclusive to Hungary.

Re: Tax on Inverstment property in Hungary

budapest said:

Where in Budapest did he buy an apartment, where he is only making a 3% return?

It doesn't matter how he financed the loan to buy the property, he still needs to make a return in Hungary, as a profit is being made in this country. The fact that he is making a loss in Ireland is only of interest to the Irish revenue. He will more than likely only have to make a 0% return in Ireland, but he would still need to go through the process of calculating this, using the tax already paid as a deductable expense, due to the double-taxation agreement. He should also be entitled to make further deductions in Ireland, such as mortgage interest, etc.

This system is the same in any overseas country and is not exclusive to Hungary.

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His apartment is in District IV. He didnt do any market research before the purchase, and the apartment has been vacant a good bit since he bought it. In fact he has has only been to see the apartment once (before it was completed).

I still can't believe he cant write off the interest paid in Ireland on the loan against the profit, it is a real cost.

Re: Tax on Inverstment property in Hungary

His major problem seems to be that he hasn't managed his investment properly. He didn't even come to see the apartment at completion, which is an obvious mistake. Is it furnished? Is he happy with his rental manager?

I don't think Hungary or any other country can be blamed for his decisions. Technically speaking, he is making a profit in Hungary, albeit a small one.

A typical case would be where an investor makes an 8% return in Hungary. He pays tax at local rates and then, when making his Irish tax return, he can deduct the amount of tax paid abroad and then use other expenses such as mortgage interest to offset his liability. You'll find that in most overseas countries, the system is similar. However, in countries where a double taxation treaty doesn't exist, an investor cannot offset tax paid in that country against his Irish tax return.

Re: Tax on Inverstment property in Hungary

Cheers Budapest

Yes, the flat was funrnished, and he has no complaints about his agent. He has had a high tenant turnover.

Anyway, the fundamental question I was asking.
Can the interest paid on his loan on Ireland be accepted as a cost by the Hungarians when submitting the Hungarian tax return ?

If it is he could show a loss (and pay no tax in Hungary). I refuse to believe that he cant write off the interest paid on the loan in ireland against the profit. I think he should get an accountant in Hungary.

Re: Tax on Inverstment property in Hungary

The interest cannot be set off against the Hungarian tax.

Re: Tax on Inverstment property in Hungary

Unfortunately he cannot offset the mortgage interest on an Irish loan against the profit in Hungary. If he doesn't already have an accountant, he should get one as soon as possible. However, he or she will only confirm this.

It's my understanding that it's not very common that the mortgage interest paid on an Irish loan can be used as a deductable expense when making tax returns in any overseas country.

He could sell the apartment if it's not making money for him. One visit is not very good, it looks like it's not being properly managed. There must be a reason for the high turnover of tenants. And before purchasing he should have researched the rental tax facts on Hungary. It's seems interest on a mortgage cannot be offset against rental income.

Looking at other posts, most (although not all) people have stated that the interest paid in Ireland is not taken into account when preparing accounts for the property in the foreign country.

This would imply that people have no choice except to over-declare profit on their Hungarian tax return if they have loans on the property in Ireland.

Anyone who borrowed 100% of the value of the Hungarian property in Ireland would be particularly screwed. They would have to overdeclare profit on their apartment to a huge degree.

However, there was one post on another forum (which related to Germany) which suggests than maybe you can use the Irish loan interest as a cost when preparing account in the foreign country

"an irish agent for selling german property informed me today that the german revenue will recognise mortgage interest from a irish bank as an expense against a german property as long as a letter is forthcoming from the irish bank stating that the loan is for the property in question".

An Irish agent with a vested interest in selling property abroad has no motivation to tell the truth, but perhaps it is true.

Also if true, this may only apply to Germany.......

I can't get my head around the whole idea that the cost of financing an asset cant be written off as cost (regardless of where the finance is raised) - the interest on the loan is a cost, a legitimate cost, the owner has to dig into his/her pocket to pay it.....in the same way as the owner has to dig into his/her pocket to pay flat insurance.

I wonder why the Hungarians dont accept it as a cost ? I'd like to ring their minister for finance in Hungary to have a word with him/her.

Kellypk said:

I'd like to ring their minister for finance in Hungary to have a word with him/her.

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His name is János Veres and you can call him (or his secretary) at 36-1-118-2066. Good luck!

Kellypk said:

I'd like to ring their minister for finance in Hungary to have a word with him/her.

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Maybe your friend might be better off doing this, as it was they who bought the property in the first instance. Though I shudder to think what Brian Cowen would say when told that an aggrieved foreigner wants to complain personally to him about his government's tax policies

How do you say "your tax laws against hard working Irish people who own property in your country are completely unfair and unbelieveble" in Hungarian ?

Kellypk said:

How do you say "your tax laws against hard working Irish people who own property in your country are completely unfair and unbelieveble" in Hungarian ?

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I dont know but if and when you find out and then repeat it to the minister in question then you will hear how they say "Stop wasting my time you pixie headed ...." in Hungarian.

Every country is entitled to set its own allowances and reliefs in such matters, Hungarians are not allowed to set off interest against rental income in Hungary irish people are allowed to do so in Ireland at the moment. There is nothing inherently unfair about this.

Madangan said:

Every country is entitled to set its own allowances and reliefs in such matters, Hungarians are not allowed to set off interest against rental income in Hungary irish people are allowed to do so in Ireland at the moment. There is nothing inherently unfair about this.

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The Irish government had a similar policy less than ten years ago.

It's possible to use mortgage interest on a local mortgage as a deductable expense if you purchase a property as a Hungarian company.

Thanks for all the comments, it's has brought clarity to the issues I had.

I suppose their policy makes it a lot more unattractive for private investors, which reduces overall demand. This is good because the prices will be lower for locals who want to buy to live there. And it's good for the exchequer there.

I've changed my mind, their policy is not inherently unfair at all.