Should I sell my house or keep it and rent it out?

Q We are hoping to buy a new home – we need more space as we now have a family. We currently live in a two-bedroom house in Crumlin on a very competitive tracker. I paid €€350,000 for it in 2008. I am told it will fetch about €260,000-€280,000 in the current market. I have been advised to sell with the suggestion that keeping it and renting it out will just be a lot of hassle and we will end up paying tax etc on it.

On the other hand, I have been advised to keep it and rent it out and I will make my money back. I would greatly appreciate any advice, should we sell?

A Much of this question will centre on your mortgage position, and you have not stated how much you currently owe your lender. I estimate you probably owe €275,000 on the current loan (assuming you borrowed the full purchase price in 2008). I've done a quick search of three-bed semis in Dublin 12 (assuming you want to stay in the same area), and these seem to be running at around €350,000 with rental values of around €1,400pm for two beds. Based on the new lending rules introduced by the Central Bank in 2015, you will need a cash deposit of 20 per cent of the new house (€70,000, plus stamp duty & legal fees).

Your total borrowings will be €555,000 (the existing loan of €275,000, plus 80 per cent of €350,000). Maximum borrowings are capped at 3.5 times the income, but exceptions apply to this rule, particularly when there is a rental property in the mix. I think you’d need a household income of around €125,000 to support this scenario.

To look at the rental side for a moment, you need to take the view that you now have a business (a residential investment property), in addition to your day job.

Rental properties do not “take care of themselves” and require active management by the landlord. Whilst tenants are responsible for day-to-day upkeep of the property, landlords remain responsible for the significant repairs and maintenance of their investment properties which typically include boiler servicing and upgrading if required, electrical and plumbing maintenance, annual checking of the property and so-on. Usually the landlord is also responsible for the replacement of appliances if problems occur.

You will also need careful tax advice. All rents received are put into the income “pot” for the purposes of calculating your tax liability, so the rental income is subject to PRSI, USC & income tax. The landlord pays the LPT charges, and the PRTB registration.

Deductions are allowed for appropriate repairs and maintenance, but not for mortgage interest. It is prudent that you provide for rental voids, when the property is being relet. You should be able to comfortably afford a number of months’ mortgage repayments whilst the property is vacant and you should have a fund available to take care of unforeseen events.

Finally, you need to look at your personal circumstances. Do you have the time to devote to a residential investment? Are you satisfied to take a long term view on the return? Are you comfortable with the risk associated with the investment?

The rental market is quite strong at present and with interest rates at such a low level, the attractiveness of keeping and renting the property is appealing. Whilst the Central Bank rules have caused certain problems in the residential property market, one positive outcome is the likelihood of less volatility in future and more sustainable increases in property prices. Coupled with consistent demand for rental properties in Dublin, “keep and rent” could well be prudent. Any investment decision requires careful consideration and obtaining proper professional advice.

I recommend you speak to a qualified financial advisor in relation to your long term financial planning, your precise borrowing capacity, and be clear as to the net return after all deductions from the rental income. Carry out a careful search of new family homes suiting your requirements, and what your borrowing capacity will allow you buy. Once you have this information I expect the answer should be considerably clearer. Edward Carey is a Chartered Residential Agency Surveyor and member of the Society of Chartered Surveyors Ireland, scsi.ie

No capital loss

Q I purchased an investment property in Ireland in December 1973 for £5,500, plus expenses of £514, total outlay being £6,014. I sold the property in June 1983 for £18,000. Indexation relief was allowable over this period. When this was applied a multiple factor of 3.76 was applied to the purchase price. Including expenses, this increased the "indexed" sale price to £22,593; as a result, the sale price registered a capital loss of £4,593. (£22,593 less £18,000). My question is can I bring forward this capital loss, created after indexing of £4,593, to offset any capital gains in future years.

A Capital Gains Tax (CGT) is a tax on gains arising from the sale of capital assets. The gain to be taxed is arrived at by deducting the cost of the asset from the sales proceeds, and applying the tax rate to the taxable gain to determine the payable amount. Where an allowable CGT loss arises on the disposal of an asset, it may be set off against chargeable gains arising in the same year of assessment.

In general, an unused loss may be carried forward and set off against chargeable gains which arise in future years.

Indexation: Indexation provides relief for the effect of inflation over the period of ownership of an asset. It was introduced in 1978, and provides relief from the part of the gain attributable to inflation.

For CGT purposes an asset purchased prior to April 6th, 1974 is treated as if it was purchased on April 6th, 1974, at the market value on that date.

This provides us with the base cost of the asset for indexation purposes. The indexation rate of 3.759 was correctly applied. The use of indexation created a “notional” capital loss of £4,593/€5,832.

There is a restriction on the use of indexed losses. Indexation cannot be used to create or increase a monetary loss. A monetary gain or loss arises before any indexation is applied to the calculation. If there is a monetary loss on disposal, the loss arising cannot be increased by indexation, and the loss available for use is the actual monetary loss. Similarly, where a monetary gain occurs, a loss cannot be created through indexation. In such instances, the disposal of the asset is treated as giving rise to neither a gain nor a loss.

When you sold your property a monetary gain of £11,986/€15,219 arose. When indexation is applied, an indexed loss of £4,593/€5,832 arose. As indexation and the 1974 market value cannot be used to create a loss where there is an actual gain, both indexation and the 1974 market value should be ignored. Applying the rules set out above, there is a no gain/no loss position.

As a result, you were not required to pay CGT on the disposal of the property in 1983. However, there are no losses available for you to carry forward against future gains.

Niamh Horgan is a Tax Manager at RSM, rsm.global/ireland