Home Economics: Is REIT safer than property investment
Published 11/04/2014 | 02:30
I have heard a lot about REITs as an alternative form of property investment. I have some money from a business sale and wonder if this is a safer way to get back into property. How do they work and what's the incentive?
Sinead says: Real Estate Investment Trusts have been slow to take off, but in the last budget Mr Noonan announced legislative changes to make them more accessible. They are essentially property companies rather than "trusts" per se and clearly offer increased purchasing power over an individual investor.
The 'Company' distributes the rental profit to shareholders by way of a dividend and these become taxable to them personally, so it's not really a tax break, but just a different ownership method. There are generally restrictions on the amount of borrowing (gearing) it can undertake.
REITs are publicly listed companies and shares in them are bought and sold in the normal way. They are very popular in the US and it can be expected that NAMA may well make use of them.
Is it safer? Well it's more indirect than you buying a house but obviously much depends on the expertise of the directors.
The portfolio should be well balanced, diverse and as ever, you should get independent financial advice before committing your cash. The proposed new legislation will have added protections for investors.
Capital gains exemption
Q. I bought two apartments – a Section 23 in Ireland in 2012 and the other in Spain in July 2013. I understand that if I retain them for seven years that no capital gains tax is payable on the sale. I currently have both rented out but can you explain how the exemption works?
Sinead says: The good news is that the CGT exemption applies to all property bought in the European Economic Area from 7 December 2011 to 31 December 2014 and which is held for 7 years. If longer, the gain will exclude the first seven years.
Barry Flanagan of Taxback.com explains the conditions. "Any income, profits or gains generated from the property within the seven year period must come within the charge to Irish income or corporation tax. While income from the Irish property may be partially or fully relieved from tax under Section 23, the argument can be made that this income still comes within the charge to tax, although is ultimately relieved.
Therefore, the fact that no income tax liability arises on the rental income is not relevant here and provided all other conditions are met, a strong case can be made that relief from CGT will apply.
"The rental income arising from your Spanish property will be liable to tax in both Ireland and Spain (on the assumption that you are resident and domiciled in Ireland).
"Relief from double taxation is available under the relevant taxation treaty. The fact that no Irish income tax is ultimately due is of no consequence. If the income is within the charge to Irish tax, the relief from CGT on sale can be claimed".
As always, seek professional advice prior to any sale, as circumstances vary.