Deadline looming for tax relief on your mortgage
Published 24/02/2012 | 05:00
Prospective home buyers currently face a number of dilemmas.
There are some who fear they will lose out on mortgage interest tax relief (MIRT) if they don't buy ahead of the deadline for the December termination of the relief, as buyers will no longer be able to avail of this relief after the end of this year.
This dilemma is particularly acute for people who bought for the first time within the last eight years because they can enjoy special tax status.
Some of them can retain this status even if they are trading up or trading down but others will lose some of those benefits if they trade on.
Many first-time buyers (FTBs), and even a few mortgage advisors, don't realise that FTB's can continue to benefit from the first-time buyer tax advantages should they trade up from an apartment to a house or vice versa, and should they make that move within seven years of their first purchase.
Furthermore, many couples, where one partner bought before the marriage, don't realise that the second partner may retain that first-time buyer status and thus extend tax relief when they move home.
The situation has become more advantageous since the last Budget with the introduction of a special tax status for FTB's who bought between 2004 and 2008. Not alone is their mortgage tax relief increased but it is also extended until 2017.
However, some of them may lose out depending on the timing of the purchase of their second house.
For tax purposes there are five types of first time buyer situations:
Real first timers
Those who have never bought a house before and who buy this year are now entitled to the mortgage interest tax relief rate up to €20,000 for a couple or €10,000 for a single person. This is claimed at a rate of 25pc in the first two years and 22.5pc in years three to five and 20pc in 2017.
Those who bought since 2009 and trade up or down within seven years of their first purchase and can continue to benefit from interest tax relief for the remainder of the seven years on the same terms as first time buyers.
In other words these do not lose their first-time buyer status.
Those FTB's who first bought between 2006 and 2008 and traded down in 2009 can continue to benefit from interest tax relief for the remainder of the seven years on the same terms as first time buyers.
In other words these do not lose their first time buyer status but they would not be entitled to the 30pc a year special rate.
Those FTB's who bought a first house between 2004 and 2008 and then traded up within the same period can claim mortgage interest relief at 30pc a year -- and retain this special first-time buyer status until 2017 provided they remain in the second home.
If they trade up to a third home this year their tax relief drops to 15pc but if they delay trading until next year they lose out on tax relief.
Marrying in to a home
Those couples where one partner may have bought on their own in 2009. Now that they have got married, this year they plan to move to a house which they are buying together.
She retains her first- time buyer status at the 25pc declining rate which lasts for seven years until 2015 while he benefits from first-time buyer status at the 25pc declining rate until 2017.
Close to expiry
But those whose seven year FTB status is close to expiring and who cannot avail of the 2004-2008 special status and are considering buying an alternative house need to consider whether they should do so before the end of this year.
Such a move would allow them to extend their tax relief until 2017 but at a lower rate of 15pc.
But some prospective buyers hope the Government will do a u-turn and extend MIRT into next year.
They point to Government track records of changing their minds about cutting property tax reliefs and how this Government has brought in extra relief for 2004-2008 buyers.
And if the banks fail to increase the numbers of home loans they approve this year the Government might well have to extend the tax relief in order to help NAMA sell off the thousands of homes it owns around the country.
Of course tax relief alone should never be the deciding factor on when to buy a home. Nevertheless buyers who bet on a Government U-turn are playing what could prove to be a very costly game of poker.