The day of reckoning beckons for investors
Published 14/10/2011 | 05:00
For many property investors who bought in the noughties the day of reckoning is nigh -- October 31 to be precise. On the other hand for investors who may be tempted to try their hand for the first time, a new era of opportunity may be about to dawn.
By October 31 existing property investors will have to pay preliminary taxes for the current year and for the first time ever this will include the payment of the universal social charge (USC) on rental income.
Those self-employed who are earning more than €100,000 from various income sources could be paying as much as 10pc on rental income.
For those those earning less than €100,000 and those on PAYE, the rate of USC ranges between 2pc and 7pc.
It's understandable in the current climate that there's not a lot of sympathy for investors who are still earning more than €100,000.
There's even less public sympathy for investors who availed of capital allowances such as Section 23 tax incentives to avoid paying tax on rental income. But for many of these investors the tax allowances have expired. For those still with allowances they are now caught by the USC from which investors cannot be sheltered by the use of such tax-incentive schemes.
However, the problems being faced by investors are not confined to these property owners. It may also impact on many young families, especially those who want to sell their apartments in order to move into a house which can cater for a growing family.
Apartment owners who bought in the boom have seen their values fall by up to 60pc in many cases, so both investors and owner occupiers are experiencing the pain of negative equity.
Investors have also been deterred from selling where the value of their property is now worth less than the amount of their loans. For many homeowners negative equity will not really prove painful until they have to move and suffer the loss.
But for investors the USC may well mean that they will suffer the pain this month.
Up to now rather than sell in a falling market, some investors have raided their nest eggs to cover ongoing costs such as mortgage repayments, management fees, insurance, maintenance etc. On October 31 when they are faced with an extra tax increase they may say enough is enough.
In addition many pay income tax at 41pc on a whack of rental income even if their mortgage repayments exceed the rents. Now many will find that the USC is adding a further 10pc to this tax, even when their rents are not covering their repayments, never mind their taxes.
Recently their costs have risen due to higher interest rates, tenancy registration fees etc. They are also facing a new property tax in the forthcoming budget. Furthermore many may face rent reductions when the Government introduces measures to reduce the €500m it is paying on rent subsidies.
So an increasing number of those investors who are paying their mortgages out of their nest eggs will now be asking themselves: "Why should I pay these extra taxes in order to subsidise tenants?
"Would I not be better off selling off the property to pay off as much as possible of the bank loan? If I still have to pay from my savings at least it goes to reduce my debt rather than to pay taxes."
Those investors who find that their finances force them to answer yes to this question may sell their properties and thus add to the supply of properties on the market.
Such sales could help home buyers who want to take their first step on the property ladder at really affordable prices. However, it will not help those families who feel trapped in small homes they want to sell but can't afford the move. Falling apartment values will exacerbate the problems of negative equity for families wanting to trade up because apartment prices are likely to continue to be depressed while houses prices stabilise.
Sadly the prospect of NAMA's price guarantee for NAMA properties could add to the selling difficulties for both investors and families in small homes.
Those most likely to benefit are those who kept their powder dry during the boom and now have the resources to snap up bargains.
Even if the Government manages to reduce rent levels, it looks like new investors will aim to buy properties which offer yields of 10pc plus as has been reflected in recent auction deals.