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4% PRSI on rents-not on income after costs- would kill off investment in buy to let housing


patslatt

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Damian Kilberd on Newstalk today said a PRSI tax on rents-not on net income after costs from housing rental property-is rumoured to be advocated by minister Joan Burton. This would kill off investment in buy to let housing,contradicting government policies to support housing prices in order to limit the banks' colossal mortgage losses.

Typically in a high quality rental property in Dublin,in an all cash deal the net income after all expenses but before income tax compensates the investor with a few percentage points of return.If it didn't,the investor would have no incentive to invest and would leave the money in the bank or in a government bond. About 3% to 4% cash return before any house price rises would be typical in high quality properties in Dublin but in lesser quality properties,it is higher. For houses bought with mortgages,4% return would not service the mortgage payments.

By contrast,in the Celtic Tiger boom investors settled for no return on investment in the early years because they expected housing prices to rise rapidly,15% a year in some years.

So if a 4% PRSI applies to rents,new investment in buy to let housing will be hit hard,depressing housing prices considerably. If the long term return on housing (including housing price rises) before income tax was expected to be,say,5% to 7% range (including inflation of 2%),the 4% PRSI on the top line rent would be punitive, increasing the top marginal tax rate on bottom line rental incomes after all expenses by maybe 9 percentage points-as if taxes aren't high enough already.Marginal tax rates of around 55% would be a deterrent to investors.However, rents would probably rise partially or fully to offset the tax in time.Meanwhile,housing prices would fall. In Dublin,if buy to let investment dropped off for a time,rental housing vacancy rates would quickly become tight,putting upward pressure on rents,including social housing rents that comprise a high proportion of the rental market. But outside Dublin,it could take years for rents to reflect the tax,given overcapacity in rental markets.

Should the government go ahead with such an irrational tax,it would be yet another sign of its desperation to avoid scrapping the Croke Park Agreement con game.
 
Last edited:


hammer

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You couldn`t have a 4% prsi rate on rental income.

It could only be on net income prior to capital allowances and S23 relief etc....

( as per self employed )
 
D

Deleted member 17573

Damian Kilberd on Newstalk today said a PRSI tax on rents-not on net income after costs from housing rental property-is rumoured to be advocated by minister Joan Burton. This would kill off investment in buy to let housing,contradicting government policies to support housing prices in order to limit the banks' colossal mortgage losses.

Typically in a high quality rental property in Dublin,in an all cash deal the net income after all expenses but before income tax compensates the investor with a few percentage points of return.If it didn't,the investor would have no incentive to invest and would leave the money in the bank or in a government bond. About 3% to 4% return would be typical in high quality properties in Dublin but in lesser quality properties,it is higher. For houses bought with mortgages,this would not service the mortgage payments.

By contrast,in the Celtic Tiger boom investors settled for no return on investment in the early years because they expected housing prices to rise rapidly,15% a year in some years.

So if a 4% PRSI applies to rents,new investment in buy to let housing will be hit hard,depressing housing prices considerably. If the long term return on housing before income tax was expected to be,say,5% to 7% range (including inflation of 2%),the 4% PRSI would reduce that return by 57% to 80% short term.However, rents would probably rise partially or fully to offset the tax in time.Meanwhile,housing prices would fall. In Dublin,if buy to let investment dropped off for a time,rental housing vacancy rates would quickly become tight,putting upward pressure on rents,including social housing rents that comprise a high proportion of the rental market. But outside Dublin,it could take years for rents to reflect the tax,given overcapacity in rental markets.

Should the government go ahead with such an irrational tax,it would be yet another sign of its desperation to avoid scrapping the Croke Park Agreement con game.
It would hurt landlords who bought during the boom - but it would not kill of new investment, where the rental returns are excellent, with capital costs halved but rents down only 10/15%, if that.
 

hammer

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The only people buying investment property are cash merchants.

75% of interest allowable as tax relief.

Bank variable rate heading towards 6%

When you bring tax into the equation the returns are negligible.
 

patslatt

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It would hurt landlords who bought during the boom - but it would not kill of new investment, where the rental returns are excellent, with capital costs halved but rents down only 10/15%, if that.
I did the numbers on rents and costs for a few properties. Did you? Rents dropped a lot more than 10 to 15% in the crash and many properties are very hard to rent,especially in the west of Ireland.
 

hammer

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OK. 1 bed apartment City Centre
€150,000
Rent €13,200
Service charge €2,000
25% deposit
Variable rate 5%

What is the return :)
 
D

Deleted member 17573

I did the numbers on rents and costs for a few properties. Did you? Rents dropped a lot more than 10 to 15% in the crash and many properties are very hard to rent,especially in the west of Ireland.
Yes - and there are many areas in Dublin where prices being achieved have dropped from 300k to 150k while rents have fallen from 1100 to 1000. Genuinely I can tell you that if I had a few bob to spare or was young enough to get a mortgage I would be buying to let - probably somewhere around Islandbridge, Chapelizod, Kilmainham.
As for the west of Ireland apartments have fallen from 170/180k peak to 50/70k while rents have dropped from 600 to 450/500 - still a much better deal for the new investor than the guy who bought at the peak - at which time the figures never stacked up - they were working on the basis of capital appreciation.
 

hammer

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Yes - and there are many areas in Dublin where prices being achieved have dropped from 300k to 150k while rents have fallen from 1100 to 1000. Genuinely I can tell you that if I had a few bob to spare or was young enough to get a mortgage I would be buying to let - probably somewhere around Islandbridge, Chapelizod, Kilmainham.
The returns are miniscule when tax at 41%, USC 7% and PRSI 4% are taken into account.

Leave it too the experts :)
 

Trainwreck

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This will do two things:

Push down property prices a little and
Push up rents a little

until the net yield is a back to a point that attracts enough rental property to meet the demand.


Yet another lesson why politicians are stupid and the footprint of government on our economy too often creates more problems than it solves.
 

laidback

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self employed people pay PRSI on their net rental income (ie after legitimate expenses). Changing to PRSI on the gross income would surely be legally challengeable on grounds of natural justice. And would income tax also be charged on gross sales rather than gross sales less business expenses?

Joan Burton is a qualified accountant though she has no recent experience of the real business world. Even so, you would think she would know better.
 

patslatt

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Apr 11, 2007
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You couldn`t have a 4% prsi rate on rental income.

It could only be on net income prior to capital allowances and S23 relief etc....

( as per self employed )
What is to prevent the government from doing so? The constitution?
 

hammer

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self employed people pay PRSI on their net rental income (ie after legitimate expenses). Changing to PRSI on the gross income would surely be legally challengeable on grounds of natural justice. And would income tax also be charged on gross sales rather than gross sales less business expenses?

Joan Burton is a qualified accountant though she has no recent experience of the real business world. Even so, you would think she would know better.
Its insane. She wouldn`t have phrased it such.

It will also quicken the mortgage default of buy to let investors already under water, but who are declaring the income for tax purposes.
 
D

Deleted member 17573

The returns are miniscule when tax at 41%, USC 7% and PRSI 4% are taken into account.

Leave it too the experts :)
Then the experts got it hopelessly wrong when they bought at peak prices. All I'm saying is that the purchase/rental ratio is a lot better now than then.
 

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