Investors need to act soon to avail of generous Section 23 tax relief

Property investors who want to reduce the tax liability on their rental income should act now in order to avail of tax shelters due to expire next year, an audience of investors and property professionals will be told next week.

"Section 23" tax relief on properties under the main rural, urban and town renewal schemes is set to expire on July 31st, 2006.

No expiry date has yet been set for a range of other property-based tax incentive schemes. However, the Government is examining how wealthy people have used these shelters to minimise their tax liabilities, in some cases to zero, and it is expected that its review will conclude that many of the schemes' objectives have been met.

"The Government will probably try and rein back the property tax reliefs or put in a minimum payment of tax, possibly in the December 2005 Budget or the 2006 Finance Act," according to Mr Ned Gladney, a tax director at accountancy firm OSK.

"On the face of it there is still time for investors to get in, but in actual fact it is running out quite quickly," Mr Gladney will tell an Irish Auctioneers & Valuers Institute (IAVI) seminar on tax planning.

For properties to qualify for Section 23 tax relief under the schemes due to expire next year, developers had to apply for planning permission before December 31st, 2004.

"The only Section 23 schemes available are the schemes that have planning permission in place, there's not going to be anything further," says Mr Gladney.

"You're going to see a decrease in supply coming into 2005, and very little in 2006. The deadline means there will be even more demand. It's like everything in Ireland: a deadline concentrates the mind."

Section 23 relief works by allowing investors to offset rental income against the cost of the property, less its site value.

Usually, at least 80 per cent of the purchase price can be used as a tax-free allowance, however the tax break will typically be higher in rural areas where site values are lower.

The main condition is that the property must be let on the open market for 10 years.

The relief applies not just to rental income derived from the property in question, but to all rental income earned from all Irish properties, residential or commercial, owned by the investor.

This makes the relief more attractive to professional investors with significant property portfolios than it is to a first-time investor looking to buy a second property.

The latter will be able to reduce or eliminate their rental income tax bill by offsetting against it mortgage interest payments anyway, Mr Gladney points out. "The Section 23s are really for the multiple property owner," he says.

Investors can take the full value of the tax break in the first year or spread it over a period of 20 years.

The more rental income they have, the quicker they can receive the benefit of the tax relief.

As developers have realised their attraction to investors, Section 23 properties tend to be priced higher than similar properties without the tax break attached.

"What you have to do is quantify the tax break," Mr Gladney says.

If the Section 23 apartment has a price of €300,000 and a tax break of €275,000, then investors will be able to pocket their 42 per cent tax bill on rental income of up to €275,000 rather than handing it over to the Revenue. In other words, the tax break is worth about €115,000.

"So the net cost of the apartment is €185,000," Mr Gladney says. "Investors need to ask if the apartment is worth more than €185,000. If it's not, it's a bad investment."

The IAVI tax planning seminar takes place at its headquarters at 38 Merrion Square, Dublin, on February 3rd at 8.30 a.m., priced €30 for non-members.