Gifted a second home

wrestlemaniac

Just a few questions if anyone could help.

Bought a home 5 years ago with my wife with 30 years now left on mortgage (both PAYE workers).

We are in the process of being gifted a bungalow by my FIL (with no mortgage) with tenants paying 600 per month.

What sort of rental return are we likely to see after tax?
Any other tax implications?
Should we leave current tenants in place?

Any opinions or advice welcome?

The_Conductor

In general- without a mortgage, the tax due on the rental income depends entirely on what other allowable outgoings you have.

1. Property tax is not an allowable cost (subject to ongoing review)
2. Management Charges/fees etc are
3. Repair work is wholly allowable
4. New furniture, fixtures and fittings- including white goods- are allowable on a 12.5% flatline basis.

In the absense of significant outgoings- you could potentially, as a PAYE employee- presumably on the higher tax bracket already- have to pay up to 51.5% tax on the rental income (if you were self employed, instead of PAYE- this would be up to 54%)

Depends- is the short and simple- however, in the absence of a mortgage- your going to loose in the region of half the rental income to the taxman.

Peregrinus

wrestlemaniac wrote: »

Just a few questions if anyone could help.

Bought a home 5 years ago with my wife with 30 years now left on mortgage (both PAYE workers).

We are in the process of being gifted a bungalow by my FIL (with no mortgage) with tenants paying 600 per month.

What sort of rental return are we likely to see after tax?

Depends on your marginal tax rate.

wrestlemaniac wrote: »

Any other tax implications?

Dear Lord, yes; gift tax. Get yourself and your wife and your father-in-law down to a solicitor or accountant for some serious tax planning before pen is put to paper on any aspect of this deal. Also look at stamp duty on the transfer, and be sure you understand how your own Capital Gains Tax liability will be computed when you eventually dispose of this property.

wrestlemaniac wrote: »

Should we leave current tenants in place?

Why would you not, if you intend to continue to treat it as an investment property? Are they not good tenants?

OldMrBrennan83

This post has been deleted.

The_Conductor

Patww79 wrote: »

This post has been deleted.

The Father-in-law potentially could, yes.
The property is changing hands- so for all intents and purposes, its a sale (albeit one in which no cash changes hands).

However, if the property is in a rent-controlled-zone- the current rent threshold holds.

OP- Heed Peregrinus's advice- you absolutely *must* do appropriate tax planning on the transaction- or else both your Father-in-law and you and your wife- will be in the hock to Revenue over the transaction.

wrestlemaniac

Why would you not, if you intend to continue to treat it as an investment property? Are they not good tenants?[/quote]

Tenants are very good, was just wondering would it be easier to start fresh.

wrestlemaniac

Dear Lord, yes; gift tax. Get yourself and your wife and your father-in-law down to a solicitor or accountant for some serious tax planning before pen is put to paper on any aspect of this deal. Also look at stamp duty on the transfer, and be sure you understand how your own Capital Gains Tax liability will be computed when you eventually dispose of this property.

Would my wife be covered under group A of gift tax criteria? Property is valued approx. 100k

evolving_doors

What would folk think of the op living in the gifted house and renting out their own mortgaged property!
Would there be any advantages?

wrestlemaniac

The_Conductor wrote: »

However, if the property is in a rent-controlled-zone- the current rent threshold holds.

Not a rent control zone, does that make a difference?

wrestlemaniac

Depends on your marginal tax rate.

If my wife and I are taxed jointly, would you know how is this calculated?

wrestlemaniac

Gebgbegb wrote: »

What would folk think of the op living in the gifted house and renting out their own mortgaged property!
Would there be any advantages?

Not possible as they are either side of the country unfortunately

Henry Ford III

wrestlemaniac wrote: »

...Would my wife be covered under group A of gift tax criteria? Property is valued approx. 100k

On the face of it yes. Well covered.

p.s. €600 p/m is a yield of 7.2% which is very strong.

Henry Ford III

wrestlemaniac wrote: »

Depends on your marginal tax rate.

If my wife and I are taxed jointly, would you know how is this calculated?

Very simply.

A rental computation takes gross rents and deducts any allowable expenses. In your case they'll be small enough I'd imagine.

The net rent is then assessed as income at your marginal rate (which will depend on your circumstances and other income).

wrestlemaniac

Henry Ford III wrote: »

On the face of it yes. Well covered.

p.s. €600 p/m is a yield of 7.2% which is very strong.

That's good to know, although if over half of it goes to the tax man it's bittersweet

etar

What if ye mortgaged the gifted property and use the money to pay down the mortgage on family home. Would there be tax advantages in that

The_Conductor

etar wrote: »

What if ye mortgaged the gifted property and use the money to pay down the mortgage on family home. Would there be tax advantages in that

You can only mortgage a rental property for repairs/renovations- aka you can't use the proceeds of a mortgage against a wholly different property. Ask your lender by all means- however, I strongly suspect they'll tell you its a non-runner.

wrestlemaniac

Henry Ford III wrote: »

Very simply.

A rental computation takes gross rents and deducts any allowable expenses. In your case they'll be small enough I'd imagine.

The net rent is then assessed as income at your marginal rate (which will depend on your circumstances and other income).

OK, from the conductor's earlier post, it looks like I'll have next to no allowable expenses like you said.

Is it possible for me to work out my marginal rate from p60 etc. or us there more involved?

The_Conductor

wrestlemaniac wrote: »

OK, from the conductor's earlier post, it looks like I'll have next to no allowable expenses like you said.

Is it possible for me to work out my marginal rate from p60 etc. or us there more involved?

You're a PAYE employee.
If your gross pay is over around 34k- you're on the higher tax bracket.
For some reason- you have to pay USC on the rental income- in theory your tax on the rental income could be just over 50%- however, any allowable costs are deductible from the gross rental income before determination of the taxable rental income.

If you're doing continuous repairs and renovations to the property- regardless of whether, or not, the tenants are present- it might be a manner of shielding some of the income from the taxman- though of course it would still be an outgoing.

Gruffalo22

Your FIL would be deemed to have sold it and may have to pay Capital Gains tax on the 'profit'. You may have to pay Capital Acquisitions tax on the gift but unlikely if your wife is his daughter - see lifetime thresholds below. The best option would be via inheritance as then no profit for father in law.

http://www.revenue.ie/en/gains-gifts-and-inheritance/cat-thresholds-rates-and-aggregation-rules/current-cat-thresholds-post-12-october-2016.aspx

If your FIL is retired or on low income he could continue to receive rent, pay lower tax, give you each a gift of the rent after taxes each year and leave it to you in his will.

You can receive a gift of up 3k from anyone each year with no CAT implications

http://www.revenue.ie/en/gains-gifts-and-inheritance/cat-exemptions-and-reliefs/small-gift-exemption/index.aspx

evolving_doors

wrestlemaniac wrote: »

That's good to know, although if over half of it goes to the tax man it's bittersweet

Aye but always consider that ye have a nice nest egg that is paying for itself with a slightly better return than a bank. You could potentially sell it at the drop of a hat and gain access to needed funds (unforseen health issues , kids in college etc).

The_Conductor

The_Conductor wrote: »

In general- without a mortgage, the tax due on the rental income depends entirely on what other allowable outgoings you have.

1. Property tax is not an allowable cost (subject to ongoing review)
2. Management Charges/fees etc are
3. Repair work is wholly allowable
4. New furniture, fixtures and fittings- including white goods- are allowable on a 12.5% flatline basis.

In the absense of significant outgoings- you could potentially, as a PAYE employee- presumably on the higher tax bracket already- have to pay up to 51.5% tax on the rental income (if you were self employed, instead of PAYE- this would be up to 54%)

Depends- is the short and simple- however, in the absence of a mortgage- your going to loose in the region of half the rental income to the taxman.

Surely paying 51% of it in tax and having 49% clean is preferable to having significant outgoings? It might reduce your tax bill but it will most likely leave you with less money in your pocket as aside from repairs you can only claim a portion of the cost against tax while the rest has to come out of your net rental income.

A mortgage in particular could eat up the full net rental income even after tax deductions.

I'd have a different opinion on it in many other businesses where far more costs are deductible and it often is very advantageous to spend money to save on tax but in renting there is no major advantage (unless you want to do upgrades etc anyway for yourself in future then you will gain from it).

AlanG

You should look at getting a mortgage and buying the property from him. He can then gift you the cash back and you can pay a whack off the mortgage on your residence. It may save you long term on tax.

I'm not an expert but I think:
- if you sell it later you will not have such a big CGT liability
- you can discount the new mortgage repayments off your rental income.

Peregrinus

Elsa Squeaking Spoon wrote: »

Surely paying 51% of it in tax and having 49% clean is preferable to having significant outgoings? It might reduce your tax bill but it will most likely leave you with less money in your pocket as aside from repairs you can only claim a portion of the cost against tax while the rest has to come out of your net rental income.

Money spend on maintenance and repairs tends to preserve or enhance the value of the property. Plus, it may increase the level of rent you can get for the property. The benefit is not solely, or even mainly, the fact that it lowers your tax bill.

Peregrinus

Peregrinus wrote: »

Money spend on maintenance and repairs tends to preserve or enhance the value of the property. Plus, it may increase the level of rent you can get for the property. The benefit is not solely, or even mainly, the fact that it lowers your tax bill.

I don't disagree with you, keeping up with maintenance and repairs is the way to go. Upgrading is even more advantegeous as it can also mean increased rent and if you plan on living in the house again you can get the work done cheaper due to allowable expenses etc compared to doing the work when living there.

However I still stand by my point, looking at the bottom line i.e. the clean profit sitting in your bank account at the end of the year you are going to work out better with no costs to deduct. Having a mortgage in particular while it allows tax relief it will most likely leave you in loss rather than profit.

Gruffalo22

AlanG wrote: »

You should look at getting a mortgage and buying the property from him. He can then gift you the cash back and you can pay a whack off the mortgage on your residence. It may save you long term on tax.

I'm not an expert but I think:
- if you sell it later you will not have such a big CGT liability
- you can discount the new mortgage repayments off your rental income.

buying the property from him = FIL to pay Capital Gains tax on the profit
gift you the cash back = You may have to pay Capital Acquisitions tax on the gift

You can discount mortgage interest only not the full payment (interest and capital). Deduction for mortgage interest should be 80% of interest this year

Gruffalo22

Gruffalo22 wrote: »

gift you the cash back = You may have to pay Capital Acquisitions tax on the gift

If he doesn't have to pay CAT on being gifted the house he won't have to pay it on the equivalent amount in cash. In fact if the money was drip fed to the op and his wife they they could receive 6k per year tax free between them before eating into the life time thresholds.

However unless they expect further large gifts or inheritances its just messy so they are far better off just being gifted the house rather than messing with getting second mortgages etc which will end up costing them money in the long run.

Tigerandahalf

I'd imagine this is becoming more common as elderly people go into nursing homes and don't want the asset to be seized by the state on death.

Gruffalo22

Elsa Squeaking Spoon wrote: »

If he doesn't have to pay CAT on being gifted the house he won't have to pay it on the equivalent amount in cash. In fact if the money was drip fed to the op and his wife they they could receive 6k per year tax free between them before eating into the life time thresholds.

However unless they expect further large gifts or inheritances its just messy so they are far better off just being gifted the house rather than messing with getting second mortgages etc which will end up costing them money in the long run.

Yes any tax payable would be depending on circumstances of OP and FIL. It doesn't matter if it is house or cash.

The gift of the house still leaves the FIL open to significant CGT but again depending on his circumstances he may be able to avail of a relief/exemption.

The net cost of a mortgage interest rate of 4% would be 2.4% after allowable tax deductions in 2017 plus legal fees to arrange the mortgage.