Property tax policy consultation

The Department of Finance is consulting on the potential economic impacts of amending property tax reliefs.

A paper and a spreadsheet model are available from www.finance.gov.ie.

By Cathal Guiomard

Cathal Guiomard is a Lecturer in Aviation Management in DCU. Between 2006 and 2014, he was Ireland's Commissioner for Aviation.

18 replies on “Property tax policy consultation”

Cathal
Who I wonder are they consulting with. The beneficiaries of the relief?
Tax reliefs are useful to people with a lot of taxable income. Why after all Ireland has been through and is still going going through are property tax breaks or indeed tax breaks of any kind still available to anybody?
The canard that people would go bankrupt is tax breaks were removed is of course the most disingenious argument of all for retention of tax breaks.

As my econ prof used to say – wrt trade: “there are winners, and there are losers, but the country is bett….”, er? Worse off?

Tax reliefs are pure scams. Better they are made un-constitutional and be done with it. If you cannot do it without a tax prosthesis – then there must be a loser somewhere (aka: Sean Taxpayer – ordinary sort).

Brian Snr.

Mortgage interest relief, as opposed to the various investment reliefs, has nothing to do with your taxable income.

The Section 23 tax reliefs were there to stimulate investment in places that wouldn’t otherwise attract it.

Bankrupting people who invested in run-down areas through government schemes does not seem like a very clever way to stimulate future investment.

Sounds like a program to close the stable door long after the horse has bolted.

It’s going to be very hard to implement a change without adversly affecting investors.

I would prefer to see the reliefs being phased out, which I believe there are very few 23 reliefs left anyway. I can’t see anybody building a new hotel these days, even if there were reliefs still available.

However changing the rules of the game after investors have committed money sounds unconstitutional.

I am glad the document mentions deadweight and the credibility costs to the state. How these can be quantified would be interesting.

My own opinion would be Landlords will be an extinct breed in the future. There’s just little or no money in it.

@Antoin

Couldn’t agree more.

The stupidity of these decisions will be the undoing of the Govt and include a general property tax on that aswell.

Explain to me who is actually going to pay it – with most properties bought since 2002 now in negative equity.

Interesting results from todays property auction in Munster with only 2 out of 63 properties actually being sold – the comments I read were that the asking prices were simply too high.

http://www.rte.ie/news/2011/0624/auction.html

@Antoin O Lachtnain:

Bankrupting people who invested in run-down areas through government schemes does not seem like a very clever way to stimulate future investment.

With respect it is nonsense to suggest that removal of property tax reliefs would bankrupt people.

Tax reliefs can only be offset against taxable income. If there is no taxable income, a tax relief has no value.

In fact most of the later (post 1990) property tax reliefs shelter rental income only from tax and not earned income.

If what you are suggesting is that the landlord would pay more tax on his rental income as a result of the removal of the property tax relief you are correct.
The reduced disposable income of the individual would then no longer be available to subsidise other ailing business interests or to fund a lifestyle to which the landlord had become accustomed. These are separate matters and extraneous to the issue of the removal of property tax relief.
In these cases it is the other business interests or the landlord’s lifestyle that is already pushing him towards bankrupcy.

@Antoin
Stimulating investment is areas that wouldn’t otherwise attract it looks like it is going to be a fabulous method of bankrupting areas that would normally attract investment without any stimulation.

The designated areas schemes were well-conceived in the 1980s and had a significant impact in improving inner city areas.

What happened in the late 1990s was the extension both in area and scope to the whole country, as part of the casino economics of that time.

There was already a boom underway and for example, why would an apartment development on Pope’s Quay in Cork — across from the Cork Opera House; 5 mins walk to the city centre and a few minutes drive from the Mallow/Limerick Road and the Glanmire Road to Dublin – – need income tax incentives?

Rossa White, then chief economist at Davy, wrote in 2008 that hotels were an often unnoticed part of the building boom over the past decade or more. Bedroom numbers jumped from 26,000 in 1996 to 64,500 in 2008 – – an increase of 150%.

In the same period, tourist numbers rose just over 70%. The boom in tourist numbers alone clearly didn’t explain this phenomenon. Cheap credit and tax breaks filled the gap.

“Tax incentives for hotel development have been generous. In effect, many investors could claw back income tax at their marginal rate at the end of seven years. That amounted to a return on investment over that period of 45-47% in most cases. Values were rising too due to easily available credit, so the final kicker was even greater,” Rossa White said. “One problem is that, as the lock-up period ends, the supply of hotels for sale is set to rise significantly due to the amount of building over the past ten years. Sales are problematic because there isn’t much of a bid in any segment of the property market right now.”

Joseph Ryan:

You would be generally right except for one thing: borrowing. And the borrowings have to be paid back out of profit after tax. The investor borrowed money to purchase the Section 23 property. He is paying back the borrowed money with the profit after tax, which is basically from the rent (from the S23 property and from other properties he owned). He is paying back the loan, note, not just paying the interest. Just paying the interest would have been crazy. If he was doing this, he is probably already in big trouble by now, S23 abolition or otherwise.

Now, he is only breaking even at best on his investment in the actual S23 property. It is making enough profit after tax to service the interest, but he is depending on profit from the other properties to make up the rest of the loan replayment.

The rental income has already fallen as a result of the recession. This will typically reduce his income by 20 percent. Well, them’s the strokes, right? He obviously needs to have some cover to protect himself. But most investors are prudent enough that they actually do.

Additionally the profit has been eroded because he can no longer fully allow the interest bill against the income from the rent. This means that his after-tax profit is smaller again.That’s another reduction in profit, of let’s say 5 percent.

What’s more, if he carries out works to repair the

But now, if the government gets rid of the capital reliefs, then you effectively reduce his after tax profit by a further 40 or 50 percent. That means that he has far less money with which to repay the loan. In fact, he now has less than 40 percent of his original profit after tax compared to before.

But his repayments remain the same as they were during the boom.

Now, he is in a position where the rental income is coming nowhere near close to meeting the loan. If he does not have very significant other income, he is going to default on the loan, or at the very least have to heavily restructure the loan. If he cannot do this (likely if the income isn’t enough) then he has to sell the property. The property is worth very little without the tax breaks that were supplied with it and he has to sell the property for far less than he bought it. He will have to sell other investment properties too. He could be bankrupt if he can’t raise the money, but he is likely to be effectively financially ruined with all his savings (tied up in the buildings he bought) destroyed.

He is also dumping property into the market at fire sale prices, causing a further slide in that market, which really benefits nobody. The steady supply of rental property is also disrupted by this craziness. It also makes the business of supplying rental supply less attractive and again, this is bad for the market. What rational person is going to invest in a long-term, slow-returning business that the government will just undermine every time it needs a few bob?

The other alternative is for the bank to somehow absorb the losses. This is not victimless either. The banks will require substantial new capital, and you can guess who will have to put that up.

All this happens because the government fails to keep its promise. All this is happening while the government is insisting, rightly or wrongly, on keeping the banks’ promises to their senior bondholders. The minister is trying to evaluate the negative economic consequences of the government not keeping its promise. This seems bizarre. The government should keep its promise because it is a promise, not because of some economic balance of convenience.

@ Anton – low house prices are great for society. It keeps young people in the country and encourages foreigners to come and set up here. It especially helps the key 20-35 demographic. Excessively high house prices have caused great damage to many people who have had to emigrate or could not get married, have children etc.
Then you have the issue of basic human rights. Shelter is a basic human right.
I am all for restructuring of mortages for people who live in their own property or have just 1 investment property/holiday home etc.
However for speculators there should be no restructuring, if they are bankrupt, they are bankrupt, their decision to speculate in property was purely for finacial gain. They should have speculated in something else because by speculating in housing they pushed up the price for people who needed shelter.
For me it is the attitude that high house prices are good for the country that has and is still ruining Ireland.
You had a large group of people who have been cheering increasing housing prices on the way up and are now cheering maintaing housing prices as much as possible on the way down through bankbailouts and NAMA. These are the people who have bankrupted the country.

The auld adage goes that it’s good to tax property as it can’t move. But just wait until I hire a couple of old buddies with giant Russian transport helicopters.

Chris: low house prices are not good for society per se. They discourage investment in housing stock. Falling prices are also not good for society. People will not invest in property which is continuously falling in value. Falling prices make it impossible for growing families to trade up, for instance. Rapidly rising prices and high prices have major drawbacks as well. The problem is finding the right price for property.

Section 23 participants are not speculators, by definition. You have to be a long-term landlord to get the benefit. Most Section 23 participants would agree strongly with you in relation to speculators. Long-term landlords don’t particularly benefit from runaway house prices. They do benefit if they sell up, but long-term landlords will hold a property for decades, rather than sell it.

You are right that there has been cheerleading of increasing house prices. There is a lot to say for your contention that these people have bankrupted the country.

However, there are plenty of other people (such as people who have bought for the first time in the last 10 years and people who actually live in rental properties) who do not have any interest in property sale prices falling headlong.

It is wrong to punish Section 23 participants, who invested in the property in response to a government invitation, because the people they bought the property off and the people who financed it went on a crazy 10-year bender.

Michael: In terms of the social utility of these schemes, let me tell you about two areas I am famililar with where there has been Section 23 development in the last phase of the Section 23 incentives. These areas are Tallaght and Ballymun -. The incentives in these areas encouraged the construction of much higher density apartments than would have been possible if it had been left to the market alone. This in turn helped support development of local services and other high density non-section 23 development close by. This has had a major positive benefit for those areas. Compare this to a location like Kiltipper near Tallaght (or numerous other developments), where low-build-cost, low-density housing has produced an area with little in the way of amenities or public transport.

Not all Section 23 schemes had a positive effect for sure. There are many totally terrible Section 23 schemes. But it would be pretty difficult to start rating the schemes for positive social impact at this stage, to determine who should or shouldn’t get the tax benefit they signed up for.

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