We will look at landlords. Why some are reluctant and getting out of the property market. We will
- Set the scene
- Stick or Twist
- Taxes
- Disparity
- Summary
Setting the scene
Willie and Delilah Wiley bought an apartment in Waterford in 2007 for €250,000. There is €100,000 left on the mortgage, and they let it for €1000 per month. A letting agent looks after it for them and they get €875 every month after fees. The mortgage repayment is €800 per month of which €300 is interest and €500 is capital. Insurance, Local property tax of €300, accountancy fees, and small repairs come to €1500. Both are working and are on the top tax rate. Let’s assume 50%. The rental computation looks like this
| Gross Rents | €12000 |
| Less Expenses | |
| Letting Fees | €1500 |
| Mortgage Interest | €3600 |
| Other costs | €1200 |
| Rental Profit | €5700 |
| Tax Liability 50% | €2850 |
The monetary position is they get €875 per month into their account and pay €800 of that to the bank. The other costs of €1500 or €125 per month results in a loss of €50 per month. Add that to the tax liability the loss increases to €288 per month.
Stick or Twist
Depends on the circumstances. Have they got 4 children all looking to head off to college? What about pensions? If they sell it for €200,000 and clear off the mortgage, they save €1100 per month. And have a lump sum of about €95,000 left which they can use for college fees. They won’t pay any Capital Gains Tax as they are selling it at a loss. This is an attractive position to be in
What if they stick? Both are on good incomes and can absorb the annual loss. They are not under pressure and have a separate savings policy for college funds. The mortgage will finish in 13 years around the time when Delilah hits 60. She hopes to retire then and will earn a small pension of €10,000 per annum. The plan is to use the rental income as a form of pension but what would she get from it? Let’s assume the rents increase to €1200 per month and she gets €1000 next after letting fees.
| Gross Rents | €14,400 |
| Less Expenses | |
| Letting fees | €2,400 |
| Other expenses | €2,000 |
| Net Profit | €10,000 |
| Tax liability 25% | €2,500 |
Delilah has €7,500 left or €625 per month. She won’t go wild on it, but she also has her other pension of €10,000. Plus, the state pension will kick in when she hits 66. Let’s assume that will be €15,000. She is happy to hold onto it and use it as part of her pension plan.
Taxes
The typical scenario is you pay the highest tax rates when you have the largest draw on your income. You are paying tax at 52% or 55% when you have a mortgage, childcare fees, and children. Then when you hit your 60’s upwards you pay the lowest tax rates. Your mortgage is gone, and the kids are no longer dependents. Yes, your income will be lower as you stop working but your money is your money. Say you are over 66 you have a rental property and the state pension. Assume a rental profit of €12,000 and the state pension of €14,000 gives you a total income of €26,000. There is no USC as the rental profit is under €13,000. There is no PRSI as you are over 66 and your tax rate is 20%
Tax Liability
Your tax liability on that income, for a single person, is €1,555 after taking tax credits into account. That is an effective tax rate of 6%. If you are a landlord and paying an effective rate of 40% and losing money you can see why it is not attractive. That is why there have been calls for a lower tax rate. In a recent Institute submission, there were calls for
- Tax deduction for local property tax against rents
- The Capital Gains Tax rate reduces from 33% to 20%
- Lower tax rate for landlords
If the Wiley’s sell their property, the CGT rate isn’t an issue. They have a loss as they bought for €250,000 and the current value is €200,000. The main reason behind the recommendation to reduce the CGT rate is to encourage the sale of land. If you own land and don’t need to sell it, then you can sit on it and wait. That’s where a vacant site tax comes into play, but this was there and never implemented. A carrot of 20% and a stick of an annual 3% would work wonders to free up land.
Disparity
One of the most notable differences in taxes is between residents and non-residents. An Irish resident will pay tax of up to 52% between Income Tax, PRSI, and USC. If that same person moves to a nice sunny island off the coast of Portugal, the tax rate will be less than half at 24.5%. A non-resident will only pay 20% Income Tax irrespective of the amount of income. If they have €100,000 rental profit or €10,000 rental profit the rate is 20%. They don’t pay PRSI as a non-resident landlord and the USC rate will depend on the rental profit. Up to 4.5% for rental profits of less than €70,000.
If you buy a property in a company the tax rates are worse. It is 25% of the rental profit. There is a surcharge if the net rental profit isn’t paid out to shareholders. This brings the effective tax rate to 40%. You take the money out of the company and up to another half is gone in taxes.
The government’s own policies made it attractive to sell. If you bought a property, rented it, and held onto it for 7 years there was no CGT. Many people purchased property with this incentive in mind. The market was low at the time and the values have increased a lot since then. Prices have gone crazy so if you are well in profit and have a very small tax liability then it can make sense to get out.
Summary
Losing money on a rental property isn’t attractive for a landlord. If you have a mortgage on it, a mortgage on your home, and have to cope with rising costs everywhere it is very difficult. Everyone’s circumstances are different. Is the issue that the landlord is getting out? If he sells a property that person buying it could be another landlord. Or a person renting who was trying to buy for years. The recent census shows us that our population is over 5 million. The number working is at the highest it has ever been. The issue is we don’t have enough houses to meet the demand for renters and buyers. Free up land and build more. If you are reluctant, it means you didn’t want to be a landlord in the first place. You need to understand your position very well and do what is right for you.
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