Media: REITS add to property price inflation

The_Conductor

https://www.rte.ie/news/business/2017/0620/884058-irish-reits/

The State is expected to lose tax revenue of €11m due to schemes designed to encourage investment in property, according to documents disclosed under Freedom of Information.

The documents analysed the costs to the exchequer of Real Estate Investment Trusts (REITs).

The information was obtained by Sinn Fein's finance spokesman Pearse Doherty who criticised REITs for adding to property inflation.

The documents show the Department of Finance expected that the tax foregone by REITs would reach €11m in 2016.

The structures are exempt from paying 25% tax on non-trading rental income if they distribute 85% of their profits to shareholders. Instead investors pay 20% dividends withholding tax.

There are three REITs in Ireland: Hibernia, Green and IRES and they had a combined profit of €280m in 2015.

Investors were paid €238m but only paid tax of €5.27m in 2015.

However, the Department of Finance said: "It is likely that there would be significant timing differences in relation to the payment of dividend withholding tax relative to the calculation of the profits per the REIT’s accounts."

Deputy Doherty said that the REITs had the "fire power" to outbid other house buyers.

"These funds are in direct competition with first time buyers and families seeking a move yet they have huge advantage because of these tax loopholes," Mr Doherty said.

"The Government needs to immediately act to close these loopholes to level the playing field for ordinary people who are being priced out of the market," he added.

However, the Department of Finance said the "minimal" loss of tax brought new sources of capital into the Irish property market.

It said it reduced the dependence of the property market on bank finance and freed up bank lending for other industries.

The Department also said it facilitated the collective investment in property which brought the benefit of risk diversification to investors.

The_Conductor

Think of the mayhem that would ensue if all landlords were afforded the right to withdraw 85% of their net rental income as a dividend, and pay 20% dividend withholding tax- instead of income tax.........

Victor

The_Conductor wrote: »

Think of the mayhem that would ensue if all landlords were afforded the right to withdraw 85% of their net rental income as a dividend, and pay 20% dividend withholding tax- instead of income tax.........

But won't they have to pay income tax on the balance?

As there is the claim that small landlords are cashing in, I'm not sure if inflation down to the introduction of REITs.

From a tenant's point of view, at least one is dealing with a professional landlord.

murphaph

Victor wrote: »

From a tenant's point of view, at least one is dealing with a professional landlord.

If the REIT offers units in your location. None of the REITs are likely to want to get involved in property outside the larger towns and cities. There will be vast swathes of the country that REITs will have no interest in, but the laws pushing independent LLs out are applied equally even where no REITs are ever likely to be active, so you will never be able to rent in those places.

The_Conductor

Victor wrote: »

But won't they have to pay income tax on the balance?

No- retain it in the business- either as a sink fund- for further purchases, or for upgrades of current units.

Nice business to be in.

Browney7

The_Conductor wrote: »

No- retain it in the business- either as a sink fund- for further purchases, or for upgrades of current units.

Nice business to be in.

Think he means the underlying owner of the shares receiving the dividend?

The_Conductor

Browney7 wrote: »

Think he means the underlying owner of the shares receiving the dividend?

They pay a straight 20%

Keep in mind this is from the net income (after all costs- including the cost of funds).

Browney7

The_Conductor wrote: »

They pay a straight 20%

Keep in mind this is from the net income (after all costs- including the cost of funds).

Is that really the case? If I'm a higher rate tax payer and receive a dividend I only pay 20%? Thought it was always you can offset any witholding tax but still effectively pay at your marginal rate?

Geuze

The_Conductor wrote: »

They pay a straight 20%

Keep in mind this is from the net income (after all costs- including the cost of funds).

Incorrect.

The REIT may get tax reliefs, but the saver/investor receiving the dividend income faces the normal taxes on that dividend.

20% is withheld, yes, but a higher rate taxpayers then owes the balance of taxes.

The_Conductor

Geuze wrote: »

Incorrect.

The REIT may get tax reliefs, but the saver/investor receiving the dividend income faces the normal taxes on that dividend.

20% is withheld, yes, but a higher rate taxpayers then owes the balance of taxes.

Me bad- you're quite correct.

Browney7

The_Conductor wrote: »

Me bad- you're quite correct.

But realistically, many of the owners of the equities have tax exempt status through fair or foul (dubious charities etc) means so much of the money has no tax applied at all

Dardania

Geuze wrote: »

The_Conductor wrote: »

They pay a straight 20%

Keep in mind this is from the net income (after all costs- including the cost of funds).

Incorrect.

The REIT may get tax reliefs, but the saver/investor receiving the dividend income faces the normal taxes on that dividend.

20% is withheld, yes, but a higher rate taxpayers then owes the balance of taxes.

The article makes reference to that point:


However, the Department of Finance said: "It is likely that there would be significant timing differences in relation to the payment of dividend withholding tax relative to the calculation of the profits per the REIT’s accounts."


I think there's a great possibility that in future, "reluctant" landlords etc. will start joining up to pool their properties into small local co-op type REITs... particularly as some management companies are refusing to deal with landlords with less than 10 properties etc.... 
Will certainly have an interesting impact on rental prices around the country

Dardania

Browney7 wrote: »

The_Conductor wrote: »

Me bad- you're quite correct.

But realistically, many of the owners of the equities have tax exempt status through fair or foul (dubious charities etc) means so much of the money has no tax applied at all

Why such a negative view of people investing in equities? Genuinely curious

Browney7

Dardania wrote: »

Why such a negative view of people investing in equities? Genuinely curious

Meant the underlying equities in the REITs.

Much of the vulture funds etc were using charity loopholes to pay next to nothing in tax which from an optics basis doesn't look good ie - don't expect to be getting fifty percent of distributed REIT profits in tax down the road but to be fair this is the same for all asset classes.

wordofwarning

The_Conductor wrote: »

The State is expected to lose tax revenue of €11m due to schemes designed to encourage investment in property, according to documents disclosed under Freedom of Information.

How much will the state gain from REITs being one of the few major developers of property in Dublin City at the moment? REITs are really the only people building huge amounts of offices and apartment blocks at the moment. Without REITs, there would likely be a lot less offices in the site. REITs actually build on sites they own rather than sitting on land banks like developers. REITs are making it possible for us to capture some of the Brexit gains

The_Conductor wrote: »

The structures are exempt from paying 25% tax on non-trading rental income if they distribute 85% of their profits to shareholders. Instead investors pay 20% dividends withholding tax.

What is wrong with that? REITs are paying out pretty much all of their profits for them to be taxed under the income tax system. It does not make a whole load of sense for them to be double taxed.

The_Conductor wrote: »

Deputy Doherty said that the REITs had the "fire power" to outbid other house buyers.

"These funds are in direct competition with first time buyers and families seeking a move yet they have huge advantage because of these tax loopholes," Mr Doherty said.

I have a feeling Doherty either does not know how REITs work or is throwing in that misleading line to connect with 'da workingman'...

First of all, a lot of REITs only interested in commerical buildings. Green only really has invests in commerical buildings in Dublin eg office blocks, industrial estates etc. AFAIK they don't own a single residential building. This notion that REITs are only buying residential buildings is far from the fact.

I have yet to hear of REITs buying a houses either. I also have yet to hear of them buying individual properties. They are buying massive apartment complexes or sites to develop. With their business model owning an apartment here and there does not fit it. It is all about scale and large quantities.

The_Conductor wrote: »

"The Government needs to immediately act to close these loopholes to level the playing field for ordinary people who are being priced out of the market," he added.

Even if the state closes the 'loophole', REITs can still borrow at 1% from banks for redevelopment. A FTB can't compete with that. If anything you may see a decline in tax revenue from REITs. They are only tax exempt if they are distributing 85% of their income. If they are no longer tax exempt, they may start hoarding cash to buy more sites, do share buybacks etc. They don't have the incentive to return value to shareholders. The state will no longer be getting the massive income tax etc that is payable on shares.

I wonder would you just see Irish REITs, now being 'British' or 'American' REITs ie the REIT will be HQed in a country with a 21st Century tax code. There will be a complete loss of tax revenue to the state there.

Victor

wordofwarning wrote: »

REITs actually build on sites they own rather than sitting on land banks like developers.

The term developer is much maligned. Developers develop properties. Is is speculators that sit on them, often leaving them vacant.