Buying our second home, what to do with your first?

maynooth_rules

We are in the process of upgrading to our second home. We purchased our first home at a good time and thankfully have not a whole lot left on the mortgage. As such we are able to, just about, purchase our new home without the need to sell our first home.
However, we are really struggling with what to do with our first home. Do we sell it and hence pay off a good 70% of the mortgage on our new home, or do we rent it out and have a steady income off it, but with a massive mortgage then from our new home?
Do the advantaged for selling our first home outweigh the advantages for renting it out.

amcalester

If it was me I'd just sell it, pay down your new mortgage and avoid the pitfalls of being a landlord.

If you do decide to keep it, it might make more sense to mortgage the rental property as much as possible as you can claim some of the interest against your tax liability, currently 75% I think.

sunnysoutheast

maynooth_rules wrote: »

We are in the process of upgrading to our second home. We purchased our first home at a good time and thankfully have not a whole lot left on the mortgage. As such we are able to, just about, purchase our new home without the need to sell our first home.
However, we are really struggling with what to do with our first home. Do we sell it and hence pay off a good 70% of the mortgage on our new home, or do we rent it out and have a steady income off it, but with a massive mortgage then from our new home?
Do the advantaged for selling our first home outweigh the advantages for renting it out.

If I were you I'd do some serious in-depth research into the pros (minimal) and cons (legion) of being a small landlord in Ireland under the current fiscal and regulatory regimes, and cast an eye to the direction in which things are inevitably moving in order to address the "homeless crisis".

In other words, sell.

hawkelady

Speaking from experience. SELL. And enjoy the finer things in life without the worry of a large mortgage. Congrats btw

blindside88

Personally I’d sell the first home as you will be exempt from tax on any profit made on the sale as it’s your principal private residence. The rent on the property would also be taxable if you rented it out, if you are eligible for 2 mortgages I’d imagine you’re well within the 40% rate. You need to bear in mind that if you get a tenant that refuses to pay rent will you be able to service both mortgages?

Fol20

maynooth_rules wrote: »

We are in the process of upgrading to our second home. We purchased our first home at a good time and thankfully have not a whole lot left on the mortgage. As such we are able to, just about, purchase our new home without the need to sell our first home.
However, we are really struggling with what to do with our first home. Do we sell it and hence pay off a good 70% of the mortgage on our new home, or do we rent it out and have a steady income off it, but with a massive mortgage then from our new home?
Do the advantaged for selling our first home outweigh the advantages for renting it out.

The biggest thing to take on board is your liability for capital gains if you turn it into a rental. If you have a sizeable gain I would sell it so you’ll not give 33pc to the government. If you really want a rental. Then buy another one at today’s prices. Personally. I wouldn’t think about investment property until your own house is paid off.

the_syco

Pro's of a rental;
You get a trickle of money.

Con's of a rental;
Lose money when you decide to sell it due to CGT.
You will probably only get 50% of the rent.
Tenant may stop paying the rent, and it'll take a year to evict them.
You'll have to clean the house each time someone moves.
You'll have to fix anything that goes wrong.
You'll have to replace things that break.
If you decide to sell, see point 3; they may not move out.
Stress.
Finding out how little right you as a landlord have, and how much the rights the tenant has.
More stress.

Pro's of selling;
At least 70% of the new house paid off and you no longer need to thing about the old house.

Con's of selling;
You're not a landlord.

myshirt

Sell, buy another property, rent it, put all money into pension for a few years, then sell.

All up to you, go to a chartered accountant and get some advice.

maynooth_rules

In regards to selling, we were hoping to but the second house and then sell our first over the few months after wards (basically so we wouldnt be trying to juggle selling and buying at the exact same time). This wouldnt open Capital Gains Tax issues would it?

Cheshire Cat

maynooth_rules wrote: »

In regards to selling, we were hoping to but the second house and then sell our first over the few months after wards (basically so we wouldnt be trying to juggle selling and buying at the exact same time). This wouldnt open Capital Gains Tax issues would it?

No it wouldn't, you have 12 months to sell the first house: https://www.revenue.ie/en/property/selling-a-house/index.aspx

steamsey

As others have said, sell. Being a landlord in Ireland is a nightmare at times and at best, an absolute pain in the ar*e. As a landlord you are perceived to be a money grabbing sub human who will stop at nothing to make a few quid. Laws are such now that tenants can stop paying their rent and you can't really do anything without spending several thousand and wait maybe 12 - 18 months to get them out.

Factor in that you are taxed on rental income, not rental profit - at the higher rate. Also factor in that once your non PAYE (rental) income hits a threshold (about 5k per anum I think) you have to register for income tax and file tax returns on ROS - which is a pain. Don't forget that you'll have to pay preliminary tax. It's not easy to do it properly and not cheap. Remember to register on RTB and don't try to increase your rent to market value - you might find that your rent increase is capped. You'll need to get the boiler serviced annually, and also fix washing machines, ovens etc as they break. The place may need painting every few years and if you do this yourself, you can't deduct it from your rental income computation. Your house insurance will go through the roof as it's now a rented property.

The current situation is pro-tenant, anti-landlord and it seems like it will continue to move in this direction. Strongly encouraging the private sector to house the less well off is the current policy. This encouragement could move closer towards enforcement at some point - I would not be surprised.

I would not recommend that anyone be a landlord in Ireland unless you are doing it professionally and have experienced staff to help - including a good lawyer or someone with strong RTB experience.

Fol20

steamsey wrote: »

As others have said, sell. Being a landlord in Ireland is a nightmare at times and at best, an absolute pain in the ar*e. As a landlord you are perceived to be a money grabbing sub human who will stop at nothing to make a few quid. Laws are such now that tenants can stop paying their rent and you can't really do anything without spending several thousand and wait maybe 12 - 18 months to get them out.

Factor in that you are taxed on rental income, not rental profit - at the higher rate. Also factor in that once your non PAYE (rental) income hits a threshold (about 5k per anum I think) you have to register for income tax and file tax returns on ROS - which is a pain. Don't forget that you'll have to pay preliminary tax. It's not easy to do it properly and not cheap. Remember to register on RTB and don't try to increase your rent to market value - you might find that your rent increase is capped. You'll need to get the boiler serviced annually, and also fix washing machines, ovens etc as they break. The place may need painting every few years and if you do this yourself, you can't deduct it from your rental income computation. Your house insurance will go through the roof as it's now a rented property.

The current situation is pro-tenant, anti-landlord and it seems like it will continue to move in this direction. Strongly encouraging the private sector to house the less well off is the current policy. This encouragement could move closer towards enforcement at some point - I would not be surprised.

I would not recommend that anyone be a landlord in Ireland unless you are doing it professionally and have experienced staff to help - including a good lawyer or someone with strong RTB experience.

Stemasey,would you mind clarifying taxes on rental income not rental profit.

The J Stands for Jay

Fol20 wrote: »

Stemasey,would you mind clarifying taxes on rental income not rental profit.

I imagine they (incorrectly) see the part of the mortgage repayments thst I'd capital as being an expense.

db

I was in your position in 2013 when you couldn't even give away a house. Rented it out for 6 months just to have someone in it over the winter but with tax, agent's fees, repairs (amazing what damage can happen to a house when the person living in it doesn't own it) & LPT we didn't see a cent out of it. We managed to sell it at rock-bottom price but happy just to be rid of it and be able to pay a good chunk off the mortgage on the new house.

Sell it for as much as you can get and pay it off your mortgage. Being a landlord is nothing but trouble.

steamsey

Fol20 wrote: »

Stemasey,would you mind clarifying taxes on rental income not rental profit.

Sure. If I am getting €1,000 per month rent, that's €12k per year. Technically this is gross income for tax purposes but I can make certain (small) dedcuctions. Repairs, cost of insurance etc can be deducted from this. I can also deduct 85% of my mortgage interest (not full mortgage repayment amount) too which is the more meaningful deduction.

So, I deduct these amounts and get down to a net rental income figure (say €9k) on which I am taxed. If you are a higher tax rate person, you will pay 52% tax on this net rental income = €4,680 to the revenue. Keep in mind that many landlords will also have a mortgage to pay. Let's say that this mortgage is €900 per month, which is €10,800 per anum. That means that at the end of the year, you have made €100 per month profit (€1,000 rent - €900 mortgage) = €1,200 per anum. You have to pay the revenue €4,680, and have made €1,200 profit so you have to pay up €3,480 out of your pocket, or have saved this amount by October / November when you file. It's brutal. And I've deliberately kept the numbers here very modest.

This is how they tax rent in Ireland.

Rental profit is very different from rental income - to calculate it, you would start with same gross income position as example above but deduct the actual full mortgage repayments plus the repairs etc as mentioned above - this then would be your net profit which would be far less than net income of course. To many landlords, this is what they feel they should be taxed on - the full mortgage repayment is the cost of having the asset on which you are earning rent that is taxed, so it arguably should be deductible. So, the main difference between rental income and rental profit is that for rental income, the cost of the capital repayments on the mortgage is not considered.

People will argue that you pay the usual income taxes on your income, not your profit so why should rents be any different. Well because I don't have an underlying mortgage that was required for me to do my job - I do for the rental income that I am earning so allow me to deduct the full amount when preparing my rental income return.

Samuel T. Cogley

I did a calc on this a while back comparing the two. It's subtly different and varies depending on the interest relief. But bottom line it is on income rather than profit.

steamsey

And just a few more thoughts:

Being a landlord in Ireland only works if you are 1) very well informed and organised and 2) playing the long game with no short or medium term need for cash

Essentially you are being taxed right now for the economic benefit of the rent which is paying your mortgage - and you will not see the benefit of the mortgage being paid off for some time (in most cases) so there is a mis-match between the perceived benefit (getting rent now) and actual benefit (when you're mortgage is paid off and you can sell the place). This is the way I look at it. It's an ongoing investment, which requires cash and attention. Also, the longer you do it, the greater your chances of getting the nightmare tenant who pulls rads off the walls, knocks holes in walls etc etc. So you'd have that going for you too.


It's a mugs game essentially. And the best part is that it'll be 20 / 30 + years before you find out if it was worth it because there is flap all point in doing it short term.

Fol20

steamsey wrote: »

Sure. If I am getting €1,000 per month rent, that's €12k per year. Technically this is gross income for tax purposes but I can make certain (small) dedcuctions. Repairs, cost of insurance etc can be deducted from this. I can also deduct 85% of my mortgage interest (not full mortgage repayment amount) too which is the more meaningful deduction.

So, I deduct these amounts and get down to a net rental income figure (say €9k) on which I am taxed. If you are a higher tax rate person, you will pay 52% tax on this net rental income = €4,680 to the revenue. Keep in mind that many landlords will also have a mortgage to pay. Let's say that this mortgage is €900 per month, which is €10,800 per anum. That means that at the end of the year, you have made €100 per month profit (€1,000 rent - €900 mortgage) = €1,200 per anum. You have to pay the revenue €4,680, and have made €1,200 profit so you have to pay up €3,480 out of your pocket, or have saved this amount by October / November when you file. It's brutal. And I've deliberately kept the numbers here very modest.

This is how they tax rent in Ireland.

Rental profit is very different from rental income - to calculate it, you would start with same gross income position as example above but deduct the actual full mortgage repayments plus the repairs etc as mentioned above - this then would be your net profit which would be far less than net income of course. To many landlords, this is what they feel they should be taxed on - the full mortgage repayment is the cost of having the asset on which you are earning rent that is taxed, so it arguably should be deductible. So, the main difference between rental income and rental profit is that for rental income, the cost of the capital repayments on the mortgage is not considered.

People will argue that you pay the usual income taxes on your income, not your profit so why should rents be any different. Well because I don't have an underlying mortgage that was required for me to do my job - I do for the rental income that I am earning so allow me to deduct the full amount when preparing my rental income return.

Ok yea your figures makes sense. I thought you were confusing it a bit. One thing I would say is normally your capital payments depending on how long you had your mortgage for might say be half of your mortgage payment so let’s say 450 per month instead of 900 which might make it more doable from a cash flow point of view. I would love if we could deduct capital payments however I’m sure you would have a ton of people overextending themselves and making the property market even more volatile. At the end of the day. It’s a long game. You may need to use some of your own funds now to pay for the place but in 20-30 years time you will have an asset worth a few hundred thousand which is still generating cash flow also.

hawkelady

You're forgetting that in 20/30 years time you will have no idea what other governments will do. Maybe CGT will be 45% !!! Maybe you will have to give tenants 4 years notice !! The majority of posts here are telling the op to sell .. take the advice

steamsey

Fol20 wrote: »

Ok yea your figures makes sense. I thought you were confusing it a bit. One thing I would say is normally your capital payments depending on how long you had your mortgage for might say be half of your mortgage payment so let’s say 450 per month instead of 900 which might make it more doable from a cash flow point of view. I would love if we could deduct capital payments however I’m sure you would have a ton of people overextending themselves and making the property market even more volatile. At the end of the day. It’s a long game. You may need to use some of your own funds now to pay for the place but in 20-30 years time you will have an asset worth a few hundred thousand which is still generating cash flow also.

And don't forget than assuming you can afford it and tolerate it for 20/30 years, when you do sell the place, it attracts CGT of 33%! So fully a third of all your hard work goes back to the Revenue again.

maynooth_rules

Cheshire Cat wrote: »

No it wouldn't, you have 12 months to sell the first house: https://www.revenue.ie/en/property/selling-a-house/index.aspx

Great, thanks for that

Fol20

steamsey wrote: »

And don't forget than assuming you can afford it and tolerate it for 20/30 years, when you do sell the place, it attracts CGT of 33%! So fully a third of all your hard work goes back to the Revenue again.

Yep, your right, here’s hoping they bring down Cgt because at 33 why would anyone invest in shares when your already taking a big gamble.All we can do though is play the hand were dealt and do our best.

Heres Johnny

I'll be selling my house this year and moving in with fiance. I've 2 options, sell or rent it out. It was an easy decision.

No cgt if I sell now

I will have 100k in back pocket after clearing mortgage which I can invest, put into pension to max fund it, pay off lump sum on fiances house or just have a very comfortable sum of money sitting there, probably a bit of all of the above

I won't be a landlord and be at the mercy of a very dysfunctional market as it is at the moment.

I'd have thought that if i were ever in this position, i'd rent the first home to a friend or relative (ie not a scumbag that will wreck it, someone you know and can trust). Give them a decent price on it and pocket it as cash (licensee etc.).

Move into the second house and live your life.


My thinking here would be based on thinking all is well in the world at the moment, but what happens if, a year down the line, you realise you actually prefer the first house? The neighbours were better, or you liked the area more or it was handier for the school or job or whatever.

Doing this would give you the option to realise the error of your ways, give your friend a bit of notice to vacate, move home and sell the second property?

Or is my outlook just too pessimistic?


Obviously if you decide you're happy where you are, you could sell the first house or become a proper landlord, but I'd be hesitant to do either when just moving to the second house and still in the early stages of living there (unless it's already very obvious to you that the new house is better all-round anyway).

hognef

steamsey wrote: »

Sure. If I am getting €1,000 per month rent, that's €12k per year. Technically this is gross income for tax purposes but I can make certain (small) dedcuctions. Repairs, cost of insurance etc can be deducted from this. I can also deduct 85% of my mortgage interest (not full mortgage repayment amount) too which is the more meaningful deduction.

So, I deduct these amounts and get down to a net rental income figure (say €9k) on which I am taxed. If you are a higher tax rate person, you will pay 52% tax on this net rental income = €4,680 to the revenue. Keep in mind that many landlords will also have a mortgage to pay. Let's say that this mortgage is €900 per month, which is €10,800 per anum. That means that at the end of the year, you have made €100 per month profit (€1,000 rent - €900 mortgage) = €1,200 per anum. You have to pay the revenue €4,680, and have made €1,200 profit so you have to pay up €3,480 out of your pocket, or have saved this amount by October / November when you file. It's brutal. And I've deliberately kept the numbers here very modest.

This is how they tax rent in Ireland.

Rental profit is very different from rental income - to calculate it, you would start with same gross income position as example above but deduct the actual full mortgage repayments plus the repairs etc as mentioned above - this then would be your net profit which would be far less than net income of course. To many landlords, this is what they feel they should be taxed on - the full mortgage repayment is the cost of having the asset on which you are earning rent that is taxed, so it arguably should be deductible. So, the main difference between rental income and rental profit is that for rental income, the cost of the capital repayments on the mortgage is not considered.

People will argue that you pay the usual income taxes on your income, not your profit so why should rents be any different. Well because I don't have an underlying mortgage that was required for me to do my job - I do for the rental income that I am earning so allow me to deduct the full amount when preparing my rental income return.

In what world are capital repayments considered an expense? Really, that part of your mortgage repayments is the equivalent of transferring funds between two of your own accounts.

The true cost of a mortgage is the interest, and realistically that and the cost of maintenance, agent's fees, etc., are your expenses related to renting out the property. So it could be argued that you are already being taxed on profit, though with some modifications such as not being allowed to deduct 100% of the interest. If you want the system to change, then it seems to me that those modifications are what you should target.

If you were to be taxed on what you consider profit, then the government (and, by extension, other taxpayers) would effectively end up paying the purchase price of your rental property for you. In that system, surely, we'd all want to be landlords?

steamsey

hognef wrote: »

In what world are capital repayments considered an expense? Really, that part of your mortgage repayments is the equivalent of transferring funds between two of your own accounts.

The true cost of a mortgage is the interest, and realistically that and the cost of maintenance, agent's fees, etc., are your expenses related to renting out the property. So it could be argued that you are already being taxed on profit, though with some modifications such as not being allowed to deduct 100% of the interest. If you want the system to change, then it seems to me that those modifications are what you should target.

If you were to be taxed on what you consider profit, then the government (and, by extension, other taxpayers) would effectively end up paying the purchase price of your rental property for you. In that system, surely, we'd all want to be landlords?

Capital repayments / that part of the mortgage repayment is only like transferring money between two of your own accounts if one of those accounts only exists 30 years into the future! I'd argue that if 33% of the (capital) gain on the property is taxed when you sell it, then 33% of the capital repayments should be tax deductible to reduce the tax burden over the life of the mortgage.

I take your points above, but the true cost of my mortgage is what the bank take from my bank account each month. I'm trying to get at the timing difference. Capital repayments, which will benefit you in 20/30 years time, and not taken into consideration for tax purposes, although you have to pay them now, with cash. Assuming there is a mortgage, this means that the only way to look at being a landlord is over the life of the mortgage. You are investing all this cash now, via capital repayments, and getting no tax benefit for it at all. Then, when you sell the house after doing this for 20/30 years, they take a third of the gain back.

It's a crazy set up.

If we were being taxed on rental profit and not rental income, or if we were taxed the same way corporation or even REITs are, then it would be a far more attractive proposition and yes, we would all want to be landlords. What's wrong with that? We're trying to (partially) solve the housing crisis with the HAP scheme. If there are no landlords left to take in tenants, then the HAP scheme will fall flat on its face, if it hasn't already. So - by this basic logic - the more private landlords the better.

The main point I am trying to make is forget about being landlord in this country - it's a significant long term investment with increasingly pro-tenant rules governing how you manage your own property. Great for tenants, bad for landlords.

I'd also say meh to the 100% mortgage interest relief. They'd feel that they've done something for landlords but in fact after the first few years of the mortgage, once the interest portion of the repayment starts decreasing, this becomes less of a benefit naturally. As the mortgage goes on, most of the repayment is capital and this means you are paying more and more tax as times goes on, albeit less interest but the same monthly repayment. As bad as it is when you start being a landlord, it gets exponentially worse.

Fol20

steamsey wrote: »

Capital repayments / that part of the mortgage repayment is only like transferring money between two of your own accounts if one of those accounts only exists 30 years into the future! I'd argue that if 33% of the (capital) gain on the property is taxed when you sell it, then 33% of the capital repayments should be tax deductible to reduce the tax burden over the life of the mortgage.

I take your points above, but the true cost of my mortgage is what the bank take from my bank account each month. I'm trying to get at the timing difference. Capital repayments, which will benefit you in 20/30 years time, and not taken into consideration for tax purposes, although you have to pay them now, with cash. Assuming there is a mortgage, this means that the only way to look at being a landlord is over the life of the mortgage. You are investing all this cash now, via capital repayments, and getting no tax benefit for it at all. Then, when you sell the house after doing this for 20/30 years, they take a third of the gain back.

It's a crazy set up.

If we were being taxed on rental profit and not rental income, or if we were taxed the same way corporation or even REITs are, then it would be a far more attractive proposition and yes, we would all want to be landlords. What's wrong with that? We're trying to (partially) solve the housing crisis with the HAP scheme. If there are no landlords left to take in tenants, then the HAP scheme will fall flat on its face, if it hasn't already. So - by this basic logic - the more private landlords the better.

The main point I am trying to make is forget about being landlord in this country - it's a significant long term investment with increasingly pro-tenant rules governing how you manage your own property. Great for tenants, bad for landlords.

I'd also say meh to the 100% mortgage interest relief. They'd feel that they've done something for landlords but in fact after the first few years of the mortgage, once the interest portion of the repayment starts decreasing, this becomes less of a benefit naturally. As the mortgage goes on, most of the repayment is capital and this means you are paying more and more tax as times goes on, albeit less interest but the same monthly repayment. As bad as it is when you start being a landlord, it gets exponentially worse.

Very valid point steamswy. One aspect I never thought about is that as a result of the decreasing interest payments over time. ll tax situation actually get worse when tbh. It should be getting better.
If you take the average joe, he starts off doing min wage type stuff. Then moves up to college grad pay and then salary increases over time while for us from a cash flow point of view it gets smaller and smaller until the mortgage is paid off