Interest Relief on BTL mortgages should be 100%, not 75%

marathonic

I was just wondering, when the interest relief on mortgage interest on investment properties was reduced from 100% to 75%, I read posts on the various forums and even heard a couple of work colleagues say that this was a good thing and it should be abolished altogether.

What they don't realise is that this isn't a gold-plated tax break and is just a reflection of the relief available to any business on its borrowings.

I now wonder, do the people that cheered this move by the government, who are mostly renters and saw it as the main factor keeping them out of the housing market (and landlords in it), realise that the move is a major factor in the upward movement in rent prices experienced in Dublin?

In effect, the additional costs have now been fully passed onto the tenant. I wonder do people now realise that further reducing such relief would only serve to eventually push rental prices further again.

I know that supply and demand is the major driver of rent prices but landlords must meet their expenses from rent so they are also a big consideration.

I also wonder whether the removal of such relief actually had the direct end result of helping any of those cheering it on to actually purchase their first home.

Lu Tze

If it was a major factor, rents would be going up across the country, not just in Dublin.

marathonic

Lu Tze wrote: »

If it was a major factor, rents would be going up across the country, not just in Dublin.

It is a major factor - just not the primary factor (that would be supply and demand). However, where demand allows it, landlords WILL raise their rents to cover their costs.

Landlords are more likely to accept rents of below market value (I know of plenty renting for 10%+ below market value) if they are making a profit at those levels - just to keep a good tenant.

If the reduction in interest relief meant that such landlords are now making a loss, they are going to seek either a rent increase or a new tenant in most cases.

johnnyskeleton

I dunno, can people pay these premium rents for much longer?

The pressure on rents IMO comes from the declassification of many bedsits which has pushed many people into studio apartments or house shares. That, plus a small increase in google people, is the only real change to demand in the dublin rental market for the last year.

I remember in 2006/07 people were advertising house shares where 5 people would live in a one bed apartment, where someone's bed was a strangers couch for €400 pm or they only wanted someone who works nights because they have to share a bed with a day worker. In the last few years people have been able to rent by themselves that bit easier but now it's going back to more sharing and a few of these crazy shares have popped up.

Government should really build more social housing because throwing money at the private rental sector is pricing many working people out of the rental market.

riclad

THIS 75 PER CENT limit means you could have a mortgage 20 per cent larger than the rental income,
and still be taxed on your income,
even though in reality , you are making no profit.
ie its a steath tax on landlords.
There are many landlords who bought houses outside dublin in the boom,
who have to pay tax even though they make no profit on rental income.

OUTSIDE dublin rents are much lower,
you cant just pass the extra cost onto your tenants.
if A shop has 70k income,
and 20k profit ,they simply play tax on the 20k.

johnnyskeleton

riclad wrote: »

THIS 75 PER CENT limit means you could have a mortgage 20 per cent larger than the rental income,
and still be taxed on your income,
even though in reality , you are making no profit.
ie its a steath tax on landlords.
There are many landlords who bought houses outside dublin in the boom,
who have to pay tax even though they make no profit on rental income.

OUTSIDE dublin rents are much lower,
you cant just pass the extra cost onto your tenants.
if A shop has 70k income,
and 20k profit ,they simply play tax on the 20k.

I suppose the question is should people be encouraged to purchase buy to let properties where the yield is so low that they make a loss? Or should they be assisted in hanging on to a buy to let investment that isn't washing its face?

If you have cash and want to buy a property and rent it out that's fine, but should we really be assisting/encouraging people to take out a mortgage, hope someone else paying rent pays off said mortgage, and gives them a profit at the end of it? I don't think we should, at least not at a time of housing shortage.

marathonic

johnnyskeleton wrote: »

I suppose the question is should people be encouraged to purchase buy to let properties where the yield is so low that they make a loss? Or should they be assisted in hanging on to a buy to let investment that isn't washing its face?

If you have cash and want to buy a property and rent it out that's fine, but should we really be assisting/encouraging people to take out a mortgage, hope someone else paying rent pays off said mortgage, and gives them a profit at the end of it? I don't think we should, at least not at a time of housing shortage.

If there's a housing shortage, it makes sense that we should be encouraging whoever can buy to buy, be it owner occupiers or landlords. The reason for this is that housing shortages are not driven by landlords renting out properties, they are driven by not enough units being built - and builders are hesitant to build new units whilst prices are low and houses already available.

I'm sure there are empty properties on the market all over Ireland that, assuming the figures are currently borderline with regards to a potential investment, may have been snapped up by a landlord and rented out by now if the 100% interest allowance was still available. A further reduction would only serve to add to this dilemma.

To deal with a house shortage, new units need to be built. The only way to do this is give incentives to property developers (imagine the uproar if the government tried this - even though it makes perfect sense and will aid potential home buyers in the long-run) or through general increases in property prices.

The fact is, landlords not buying isn't going to house more people. It's just going to result in less rental properties being available.

johnnyskeleton

marathonic wrote: »

If there's a housing shortage, it makes sense that we should be encouraging whoever can buy to buy, be it owner occupiers or landlords. The reason for this is that housing shortages are not driven by landlords renting out properties, they are driven by not enough units being built - and builders are hesitant to build new units whilst prices are low and houses already available.

I'm sure there are empty properties on the market all over Ireland that, assuming the figures are currently borderline with regards to a potential investment, may have been snapped up by a landlord and rented out by now if the 100% interest allowance was still available. A further reduction would only serve to add to this dilemma.

To deal with a house shortage, new units need to be built. The only way to do this is give incentives to property developers (imagine the uproar if the government tried this - even though it makes perfect sense and will aid potential home buyers in the long-run) or through general increases in property prices.

The fact is, landlords not buying isn't going to house more people. It's just going to result in less rental properties being available.

It also results in less competition to buy houses, hence less upward pressure on prices.

riclad

MAYBE the government ,could give landlords a tax break,
if you buy a house ,outside, dublin,city
cork,galway city,
you get 100 per cent tax relief on the mortgage for 20 years.
if you rent house on ras rent allowance scheme anywhere, you get 100 per cent tax relief on the mortage
.
ie only pay tax if you make a real profit on the rental unit.

kkelliher

Maybe the government could stay out of the property market altogether and allow it to operate in a proper economic way instead of constantly changing taxes and allowances for purely political reasons. A btl should be treated as a business both for good and bad and it should be allowed to operate as such like most other developed countries. It should not matter if you are an investor or an owner as the reality is the future for a large amount of people will be renting due to basic unavailability of land to build houses in the main centers.

murphaph

Why not just accept that mortgage interest is a business expense and allow it's deduction @100% (as was the case before and still is the case in the US, UK, Germany etc. etc.) Ireland has to be different. The 75% change was not done for any other reason than to increase tax revenue.

kkelliher

murphaph wrote: »

The 75% change was not done for any other reason than to increase tax revenue.

It was political as they wanted to be seen to be doing something to all those making millions in property. Instead of dealing with actual tax breaks they decided to kick the small investor who instead of building unneeded hotels and student accommodation bought a second property as a pension and are getting hammered as a result.

murphaph

Don't agree that it was politically motivated. Most normal punters have no idea what a LL can deduct. Just not enough political points to score IMO. They say LLs as an easy target, like special needs and blind pensioners: a minority group basically. Same reason they'll never cut a single Euro from the state pension: too large a voting bloc to annoy.

MouseTail

kkelliher wrote: »

It was political as they wanted to be seen to be doing something to all those making millions in property. Instead of dealing with actual tax breaks they decided to kick the small investor who instead of building unneeded hotels and student accommodation bought a second property as a pension and are getting hammered as a result.

Whilst there certainly were too many hotel rooms built, the same cannot be said for Student Accommodation. That tax relief was very effective.

The_Conductor

Instead of raising the interest relief on BTL mortgages to 100%- I'd take a different approach, and argue that interest on borrowings, should not be allowable as a tax deductible expense- in any sector.

Looking at the bigger picture- we have a corporation tax rate of only 12.5%. Companies are abusing this by borrowing in Irish subsidiaries, and lending the money to other subsidiaries- while writing off their Irish borrowings against tax- effectively paying little if any Irish tax on Irish (and other earnings). This is wholly independent of the interesting domiciliary structures the likes of U2 have come up with pay little if any tax.

If Companies are allowed write off their interest bills against tax- why aren't individuals? Why are the self employed allowed do so- but not PAYE employees?

I think it is an anamoly that needs to be addressed- the tax code is not seen by the vast bulk of tax payers as equitable- and once most tax payers imagine it isn't equitable and fair- it needs immediate reform, however that may be.

The sooner international tax treaties are updated the better- Ireland is being held up in unfair light (when the UK and the Netherlands are getting away with daylight robbery of other countries legitimate tax takes, under the radar). Our issue is we cannot simply write-off large tax pools- we need the money- so we need to reform and plug holes- while at the same time make sure we don't scare the bejesus out of potential FDI employers.

It isn't fair that BTL investors are treated differently from investors in any other industry- I'd argue that there should be a uniform approach on this- but not in the direction of allowing interest relief on borrowings for everyone- but in disallowing interest relief across the board.

As a consequence- companies and individuals might sit down and crunch the numbers- and only borrow when the figures actually stand-up- not ignore the true cost of the money, safe in the knowledge that they could write it off as an allowable expense- if it doesn't work out.

The_Conductor

MouseTail wrote: »

Whilst there certainly were too many hotel rooms built, the same cannot be said for Student Accommodation. That tax relief was very effective.

Student accommodation in chosen locations- was fully designated, and up to 100% of purchase costs were writable off against rental income over a set period of time. Its not the fault of developers that many of the desireable locations were even more desireable for residential developments- and student developments effectively got priced out of the (very fair) equation.

Even at this late stage- the tax code could be manipulated to support these type developments. The will has to be there though (and it certainly isn't at the moment).

murphaph

The_Conductor wrote: »

Instead of raising the interest relief on BTL mortgages to 100%- I'd take a different approach, and argue that interest on borrowings, should not be allowable as a tax deductible expense- in any sector.

Looking at the bigger picture- we have a corporation tax rate of only 12.5%. Companies are abusing this by borrowing in Irish subsidiaries, and lending the money to other subsidiaries- while writing off their Irish borrowings against tax- effectively paying little if any Irish tax on Irish (and other earnings). This is wholly independent of the interesting domiciliary structures the likes of U2 have come up with pay little if any tax.

If Companies are allowed write off their interest bills against tax- why aren't individuals? Why are the self employed allowed do so- but not PAYE employees?

I think it is an anamoly that needs to be addressed- the tax code is not seen by the vast bulk of tax payers as equitable- and once most tax payers imagine it isn't equitable and fair- it needs immediate reform, however that may be.

The sooner international tax treaties are updated the better- Ireland is being held up in unfair light (when the UK and the Netherlands are getting away with daylight robbery of other countries legitimate tax takes, under the radar). Our issue is we cannot simply write-off large tax pools- we need the money- so we need to reform and plug holes- while at the same time make sure we don't scare the bejesus out of potential FDI employers.

It isn't fair that BTL investors are treated differently from investors in any other industry- I'd argue that there should be a uniform approach on this- but not in the direction of allowing interest relief on borrowings for everyone- but in disallowing interest relief across the board.

As a consequence- companies and individuals might sit down and crunch the numbers- and only borrow when the figures actually stand-up- not ignore the true cost of the money, safe in the knowledge that they could write it off as an allowable expense- if it doesn't work out.

That would be fair at least. I'm actually a fan of flat taxes with no reliefs. Most people aren't of course.

The_Conductor

murphaph wrote: »

That would be fair at least. I'm actually a fan of flat taxes with no reliefs. Most people aren't of course.

You get all sorts of weird anamolies when reliefs start entering the equation- look at France- corporation tax rate of 32%- but effective corporation tax rate, of below Ireland's actual collection rate (and our corporation tax rate is 12.5%).

I'd abolish reliefs in a heartbeat- charge everyone, companies and individuals, a flat 10%- and make the tax code so simple no-one will have any issue making a return, or paying their legitimate tax.

As an aside- did you know that a childminder has to fill a 26 page tax return......... and we wonder why so many people work under the table.......... (aside from our punitive tax rates that is).

kkelliher

murphaph wrote: »

Don't agree that it was politically motivated. Most normal punters have no idea what a LL can deduct. Just not enough political points to score IMO. They say LLs as an easy target, like special needs and blind pensioners: a minority group basically. Same reason they'll never cut a single Euro from the state pension: too large a voting bloc to annoy.

It was clearly political at the time. Its also a tax increase and not a cut which is generally a political statement. Its hard to see any rational for this from a tax generating perspective but then little to do with how property taxation is arranged in ireland makes sense

kkelliher

MouseTail wrote: »

That tax relief was very effective.

Yes and very effective to those who bought lots of them and left them empty just because they wanted the tax relief for their earnings as apposed to using the property as a pension which was the basis of my original point

Claw Hammer

The_Conductor wrote: »

Instead of raising the interest relief on BTL mortgages to 100%- I'd take a different approach, and argue that interest on borrowings, should not be allowable as a tax deductible expense- in any sector.

Mortgage relief for BTLs went completely for new borrowers in 1998 as a result of the Bacon report. Rents doubled within three years. Bacon had to be reversed. The 75% limit is now causing rents to nudge up.
Credit is the lifeblood of business. No business can afford to pay tax on profits and then pay interest on borrowings, if the profits have not been reduced by the amount of the interest.
Borrowing in business would end. There would be virtually no investment at all.

The_Conductor

But its an active incentive to leverage assets as far as possible- as you can write off the cost of the finance against taxable income? If businesses can do this- why not allow private people to do likewise.

Also- the current upward tick in rents- is very geographical in nature- there are plenty of places with an abundance of vacant property- where rents have not increased, its only those areas where there is a deficit of rental property that rents are going up. Cutting the cost of finance (to nil) isn't going to help this- building more property and changing the mindset of people to live in higher density units- will.

Godge

murphaph wrote: »

Why not just accept that mortgage interest is a business expense and allow it's deduction @100% (as was the case before and still is the case in the US, UK, Germany etc. etc.) Ireland has to be different. The 75% change was not done for any other reason than to increase tax revenue.

The rent relief distorts the market.

For a start, banks have always been able to charge prospective landlords more than prospective owners, even though the security is the same. Some of that extra profits that the banks make out of landlords comes from the tax relief that the taxpayers give to landlords.

loyatemu

Godge wrote: »

The rent relief distorts the market.

For a start, banks have always been able to charge prospective landlords more than prospective owners, even though the security is the same.

the security is probably better - its virtually impossible to repossess a family home. BTLs are fair game by comparison.

manonboard

Could a 100% relief be abused by simply purchasing it as a business item (btl) and then living in it after the mortgage is paid?

In comparison to say an office space, where people generally would not live in an office or warehouse..

The_Conductor

manonboard wrote: »

Could a 100% relief be abused by simply purchasing it as a business item (btl) and then living in it after the mortgage is paid?

In comparison to say an office space, where people generally would not live in an office or warehouse..

Why bother ever repaying the mortgage- keep topping it up in perpetuity- and never repay it- sure its a deductible expense against rental income....... Its nuts really. How about putting a time limit on it?

Ray Palmer

Lu Tze wrote: »

If it was a major factor, rents would be going up across the country, not just in Dublin.

That is where people misunderstand markets and economics.

The reason rents are going up for in demand areas is because the market can now take the increased prices. There is just a delay in when prices get pushed up when expenses go up.
If the market can't take it you have to take the extra expense. Once the market improves you increase the rent in line with expenses and if you can you increase to recoup the lesser income from when your expense went up and couldn't increase the rent.

So pushes on rent are really a lot to do with the government. Ever single extra expense to a LL will be passed on it is just a matter of time.

The other thing is many people think it is great when LL get an extra expense and go on about how they won't pay any extra rent. It is such a short sighted incorrect view as that expense will go onto rent. Tenants should actually oppose extra expenses on LL but they foolishly love it and think the LL will be paying more on their income forever more. It eventually goes onto rent, it is just a matter of time.

These are the people complaining about rising rents at the moment and calling LL greedy money grabbers. What did they expect costs went up?

The_Conductor

Its not just that extra costs get passed on (which will happen in any event)- its basic supply and demand- and Dublin has a vastly smaller supply of residential properties than there are tenants seeking to live there. So- prices rise- until such time as there is equilibrium of some sort- it doesn't mean the increased costs are being met (or indeed vastly exceeded)- it simply means that the price of rent has risen to people's capacity to pay it.

In the absence of increased costs on the landlord- rent would still rise- perhaps by an identical amount- because of the scarcity of supply.

Yes- landlord's will try to recoup additional costs- they'd be quite unusual if they didn't- but they are business people first and foremost- and their fundamental goal is to maximise their potential income- independent of other factors- increased costs being but one factor on the list (additional regulation and new guidelines on residential standards, being another two- on a long list).......

Saying landlords will pass increased costs onto tenants- is only looking at a very small part of the equation- look at the bigger picture- and the massive imbalance between supply and demand- thats why rents are rising.

Ray Palmer

The_Conductor wrote: »

Saying landlords will pass increased costs onto tenants- is only looking at a very small part of the equation- look at the bigger picture- and the massive imbalance between supply and demand- thats why rents are rising.

I think that is a misunderstanding of what supply and demand actually is. Supply is determined by return from costs. People supply based on a return. Many people think supply and demand is a very basic calculation which it isn't.

Supply and demand is also different depending on the market entry/exit criteria. Supply and demand is the big picture.

Rent goes up quickly and highly because of losses in preceding years. It forces LL to recoup the costs it also makes them increase prices for the lean times and fear of an additional cost coming in willy nilly. I have to increase my rent due to the government's behaviour not just because I can get more. That means I don't give tenants a preferential treatment for already being there. If they can't afford the rent I am not going to set myself up for a loss to be nice.

Claw Hammer

The_Conductor wrote: »

But its an active incentive to leverage assets as far as possible- as you can write off the cost of the finance against taxable income? If businesses can do this- why not allow private people to do likewise.

Also- the current upward tick in rents- is very geographical in nature- there are plenty of places with an abundance of vacant property- where rents have not increased, its only those areas where there is a deficit of rental property that rents are going up. Cutting the cost of finance (to nil) isn't going to help this- building more property and changing the mindset of people to live in higher density units- will.

Business is taxed on profits as is only sensible. An off licence buys in its stock and sells it. It is naturally taxed only on profits otherwise it would cost money to be in business. Interest is an overhead of business the same as rates or any other expense.
Landlords do not have the cost of financing reduced to nil. The interest is deducted from the profits so the tax saving is the marginal tax rate multiplied by the amount of interest deducted. eg. €5,000 interest deducted results in tax of about €3,000 not paid but the remaining 2k must be paid.

AS regards an active incentive to invest, this is not correct. Employing a person to do work is tax deductible. Why do we not see everyone being employed? even after deductions there is still a cost.


Building more property will not happen if there are disincentives for purchasers.
Buying a property, renting at a loss and then having to pay additional tax on top of that is a disincentive.
Interest relief was eiiminated for private purchasers because it was distorting the market and was biased in favour of the wealthier buyers.
If the current situation persists more landlords will go into receivership, causing rents to rise and those unborrowed landlords will be able to keep putting up the rents.
There may be some benefit to purchasers as they wont have to compete with investors, but that will be of little comfort to the rental sector.