Section 23 tax relief developments a roaring success story for investors

Residential schemes with Section 23 tax relief continues to attract those seeking a tax shelter for rental income, 15 years after it was introduced. Una McCaffrey reports

Anybody who embarks on the search for an apartment in 2004 will at some point stumble upon glossy sales brochures highlighting the "Section 23 relief" that will be available on a given property.

For most would-be buyers, the offer will mean little, with the benefits of Section 23 far from evident from its rather opaque name.

For some more canny property players, however, the Section 23 factor will be the very thing to push them over the edge and into a purchase.

The tax relief that such properties will allow will vary from person to person, but there is no doubt that Section 23 has for many years now been big business for people in the know.

Figures on the area are difficult to obtain, partly because Section 23 runs across a number of different government bodies, from the Department of the Environment and Local Government to the Department of Finance and finally over to the Revenue Commissioners.

The most up-to-date numbers available from the latter agency are striking, however, with Section 23 estimated to have cost the Exchequer as much as €28 million in the 2000/2001 tax year.

This is likely to have risen substantially in the meantime as investors acted on an expectation that Section 23 relief was on the point of being abolished.

In fact, it was extended until mid-2006 in the most recent Budget, with the Minister for Finance, Mr McCreevy, recognising that construction bottlenecks had delayed the completion of many such projects.

Section 23 was first introduced in 1988 and has since been extended and amended on a number of occasions. Its aim was to inject some energy into inner city areas (and some rural locations) by making it financially efficient to construct housing there and, consequently, encourage more people to set up home in previously-forgotten locations.

The relief applies to both new and refurbished properties as long as they meet certain criteria, with Section 23 benefits available for both the property's owner and the builder who constructed it in the first place.

The relief works by allowing an investor to claim a taxable loss on the property which can then be used to offset taxable rental income in the first year.

Any relief that has not been used up in the first year can then be carried forward.

It is usually available for at least 80 per cent of the property's purchase price, with investors generally tied into the scheme for a 10-year period.

This timing is important, according to Ms Maeve Corr, director of Deloitte Pensions & Investments, who points out that if a qualifying investment is sold within 10 years, the original investor will have his allowances clawed back.

"The new investor, however, is then entitled to claim relief on these clawed-back allowances. If the property is sold after 10 years and the qualifying conditions are met, any unused allowances remain with the original owner and may be used against future Irish rental profits," she notes.

Ms Corr says Section 23 investments tend to suit individuals with "high unsheltered rental streams" or, in other words, substantial rental income that generates a high tax bill.

She also suggests that since the relief relates to residential units, it tends to suit investors who are active in the market or management or have a portfolio of residential property.

As far as the tax benefit itself goes, it will be most efficient for investors with high rents because of its availability from the first year. This means that people with very large tax bills can use all of the relief in one 12-month period.

The properties featuring Section 23 relief are generally high-spec apartments aimed at young professionals who have the capacity to support good rents.

"Proximity to amenities and work tends to drive the price," says Ms Corr.

Acknowledging that such apartments or houses offer an efficient means of sheltering income, Ms Corr warns that would-be Section 23 investors should be aware that the allowances will be factored in to the purchase price.

This means that any investment should be considered on factors such as commercial merits, rentability and location.

"Any investment should be judged on its real commercial potential including future capital appreciation of the asset as well as a mere tax shelter," she says, adding that stamp duty and other initial expenditure should also be given due consideration.

As far as mortgages go, Ms Corr says borrowings against the acquisition will also be allowable to shelter the rental income. She points out however that "other rental income shelters are available which may take less management and maintenance".