This article was in the Irish Times Property Supplement on 27th Jan and explains why things have become so difficult for landlords recently. Just 1 small point; PRTB is now €90 not €70 as stated in the article.
Far from being members of a fat-cat elite, many small-time property investors say they face bankruptcy if Section 23 tax reliefs are phased out, writes CAROLINE MADDEN
MENTION the phrase “Ireland’s landlord classes” and it conjures up images of a rackrenting, bed-sit- peddling elite who simply sit back and watch the money roll in from their vast property empires. In reality, today’s landlord is much more likely to be a small-time, buy-to-let investor, with one or two white elephant properties, who is now facing death by a thousand cuts.
Last Thursday night, about 250 such property investors gathered on Dublin’s northside for a meeting of the Irish Property Owners Association (IPOA), where they expressed fears of financial devastation. Many warned they would face bankruptcy if the curtailment of Section 23 tax relief announced in Budget 2011 went ahead.
The following afternoon, IPOA members and thousands of other investors breathed a sigh of relief as the Finance Bill put the Section 23 proposals on ice until at least 2012. However although they have been granted a reprieve, it is only temporary.
In last December’s Budget, Minister for Finance Brian Lenihan announced that property-based legacy reliefs were to be phased out. The most controversial element of this related to Section 23 tax relief on rented residential property in tax-designated areas.
The main attraction of this type of property for investors was the ability to offset between 75 and 90 per cent (typically) of the purchase price against all of their Irish rental income, thereby cutting their tax bill.
However Minister Lenihan announced that from January 1st 2011, the relief could only be offset against rental income from the Section 23 property, as opposed to rental income from all of the investor’s Irish properties.
As the rents on Section 23 properties tend to be low, and borrowings are almost always high, little or no taxable income arises on such properties. Therefore if the tax relief were to be ring-fenced in this way, it would become worthless for many investors.
Doubtless the Government banked on the public appetite for meting out punishment to anyone associated with property development to carry this proposal through. However the big property players would have escaped unscathed from any such restriction, as they were generally able to use up their all of their reliefs or allowances in the first year or so.
Instead, small individual investors – from middle-class full-time landlords to tradespeople to pensioners – would have found their unused Section 23 relief effectively guillotined this year.
Representative groups argued that to retrospectively change the terms of the incentive was unfair, as investors had a legitimate expectation of being able to claim the full relief as offered to them by the State at the time of investing.
The Government was inundated with several hundred submissions to this effect and announced it was delaying the change, ostensibly to allow for the completion of an economic impact assessment.
In reality, as Labour finance spokeswoman Joan Burton summed it up last week, what the Government has done is to simply kick the can down the road.
It will take at least six months for the assessment to be completed, by which point it will be someone else’s problem as a new government will be in place.
If the Labour Party gets into power it is unlikely to take a softer line with property investors than the current Government, but it is impossible to predict whether the Section 23 proposals will eventually be implemented, changed or scrapped.
A recently-formed group, Justice for Investors, is encouraging investors to continue lobbying TDs and the Minister for Finance on this issue because of the uncertainty surrounding it. It has provided sample letters and TD lists on its website, justiceforinvestors.com.
Paul Reynolds, president of the Institute of Professional Auctioneers and Valuers (IPAV), has highlighted the fact that the deferral of any decision on property incentives has created serious uncertainty in the market. Investors now find themselves caught in a limbo – whatever hope they had of selling a Section 23-type property before, they have even less chance now.
This tax-shelter saga is not the only thorn in the side of property investors. In the 2009 emergency Budget, the amount of mortgage interest that could be offset as an expense against rental income was reduced to 75 per cent (from 100 per cent).
According to a Munster-based landlord (who did not wish to be identified) with more than 20 properties and no other source of income, this is a more serious issue for investors than the proposed restriction of Section 23 reliefs as it affects everyone who owns a second property and rents it out. “It’s not purely rack-renting fat landlords,” he says. Many investors are just waking up to the impact of this change now, as they only became aware of it when they filed their tax return three months ago.
“It’s a bigger but less immediate problem. People are going to slowly go bust,” says the landlord.
“With the 75 per cent mortgage interest restriction, there is no case for investing in residential property in Ireland,” he says. “You can only lose money.” He makes the point that if, for example, an individual earns €1,000 a year in rent, and they pay €1,000 in mortgage interest, (ignoring other expenses) they are breaking even. However they can only deduct €750 for tax purposes, and therefore will be taxed on €250, even though in reality they did not make a profit.
“It’s one thing to pay tax on income you have. It’s quite another to pay tax on income you don’t have,” he says. He believes that if the 75 per cent interest restriction is not repealed, he’ll be “wiped out” and the property market will not recover. “Investors are never coming back into the market while some of the interest costs are disallowed,” he predicts.
Like many investors, he is only repaying interest on his property borrowings at the moment. “I can only repay capital if I’m making a profit, so I’m interest-only.” He says he has been “invited” by his bank to begin repaying capital, but he has not been “compelled” to do so.
“If I was, it would be become a distressed loan, so the banks can’t afford to go there,” he says. Different banks have different approaches, though, and many investors have been contacted by their lenders in recent months to inform them that they are due to begin repaying capital on their borrowings.
In some cases, investors on tracker mortgages have been presented with two options: begin repaying capital as well as interest, or switch to a more expensive variable rate mortgage and remain interest-only for a further period of, say, two years.
The problem is that many landlords are struggling to meet their interest repayments, let alone repay the principal of the loan. Not only have rents shrunk, but the list of expenses landlords face has grown considerably longer. Firstly, there’s the annual non-principal private residence (NPPR) charge of €200, which cannot be written off for tax purposes.
If the investor’s property is divided up into different flats, bedsits or apartments, this charge applies to each of the units.
Management fees are another area of growing concern for owners of apartments, including buy-to-let investors, as they can run into thousands each year. Landlords also have to register every tenancy with the PRTB now, at a cost of €70.
And as of January 1st, 2009, all homes for sale or rent have been required to have a BER certificate, which indicates how energy efficient the property is. There is no set fee for getting a BER assessment carried out, as it depends on the type of property, but it usually costs between €120 and €300.
“A lot of people are in a situation where they would be better off to have nothing [no property],” a spokeswoman for the IPOA said. “They’d be better off on social welfare instead of working and paying money towards their investment properties. They’re in a situation where they have pared down their own expenses to the bare bone.”
With the most vulnerable sections of society being hit by budget cuts, and family homes being repossessed, there is little sympathy for those who saddled themselves with debt to join the landlord classes.
But with no property market recovery in sight, many investors will soon be forced to choose between paying their taxes and repaying their borrowings, at which point their problems will become the State’s problems too.
Multi-unit bill will prevent rip-offs
NEW legislation which came into force this week may help prevent apartment-owners being ripped off by management companies. The Multi-Unit Development Act, which was signed into law by the President, Mary McAleese, on Monday, addresses major weaknesses in current legal protections for people who buy units in apartment blocks.
A key provision is that ownership of common areas in apartment blocks or housing estates is transferred from the developer to the management company, controlled by owners, before any unit is sold.
Transfer of ownership must occur in a timely fashion for developments already completed or partially completed. This addresses a situation where developers have held on to a small number of units to retain control of the development company. It has led in some cases to management fees running into thousands of euro being levied on apartment owners.
Another requirement will be an annual minimum contribution of €200 per unit for a sinking fund to meet any large, unexpected or non-regular costs. One unit, one vote, will apply on management companies and owners will have to pay charges, whether they are a developer or not and whether the unit is occupied or not.
The Act is one of the last that the current Dáil will pass before it is dissolved. However, the related Property Services (Regulation) Bill, which provided for the setting up of a national house price register, didn’t make it through all stages in the Oireachtas. As a result, housebuyers and sellers will remain in the dark about prices, at least until a new Government tackles the issue.
Costs, benefits for landlords
The dream of capital appreciation has been replaced by the nightmare of negative equity. Most investors who bought between 2004 and 2008 now find their borrowings exceed the value of their properties, in some cases by several hundred thousand euro.
Although rents are showing signs of stabilising, they have fallen to levels last seen at the turn of the millennium.
Mortgage repayments : interest rates are set to rise; many investors are coming to the end of their interest-only term; and only 75 per cent of mortgage interest is now allowed as a deduction for tax purposes.
Annual Non-Principal Private Residence (NPPR) charge : €200 per unit
Cost of registering each tenancy with the PRTB : €70
BER assessment : €120-€300