Sell or rent

c98bf0ca

Hi,

Hope you can help me with a dilemma we are having on whether to sell or rent. I currently own a mortgage free home in Dublin valued at roughly €400k (purchased for €170k 7 years ago). We are now in a position where we are looking at moving house but we are trying to decide whether it would be better long term (for our children) to keep our current house and rent it before our kids are gifted/inherit it or sell it now, get a lesser mortgage on new home and start saving into a fund for our kids (put in monthly amount saved from lower mortgage repayments).

My initial instinct was that with the rental market the way it is and the rents currently available (would be looking at roughly €1900 per month or 5.5-6% yield per annum) that to keep and rent should be strongly considered. However on thinking about/researching this further, there are some negatives with this course of action.

1)The transfer of the property in the future will open itself to CGT liability (whereas we can avail of principal private residence relief if sold now), 2)As there is no mortgage on the property (and hence no mortgage interest to offset) we are liable to tax at higher rate on majority of the rental income we do receive which will greatly reduce the benefit, 3)Being a landlord requires plenty of time and money over the period of tenancies and there is not always a guarantee that the property will let 100% of the time & 4)The stress involved in both being a landlord and also maintaining a high mortgage (albeit it will be subsidised by the rental profits).

I know there is a possibility that the house will appreciate in value over the period but there is just as strong a chance that it will decrease in value so from that perspective can we assume that the value of house will be the same no matter when we sell/transfer it. Also, our mortgage broker is confident that we will be able to borrow the higher amount if we choose to keep and rent it so that shouldnt be an issue.

Thanks in advance for any advice you may have, points I may have missed or own personal experience.

pilly

From my experience as a LL I would say sell, unless you plan on living close by the current property and have plenty of time on your hands. The hassle is not worth it.

You could be lucky and get excellent tenants but you could be unlucky. Maybe just insert into the scenario a case where rent is not paid for 2 years and would you manage through that?

Also, you'd have to factor in that there may be a crash at some time in the future again.

Graham

pilly wrote: »

Also, you'd have to factor in that there may be a crash at some time in the future again.

I would almost guarantee there will be a crash at some point in the future. Followed by a recovery. It's not an issue unless you're highly leveraged or need to offload in a hurry.

If you're prepared for the hassle OP, I'd think about renting. I'd also consider a relatively low B2L mortgage on the rental property to reduce your tax and free up capital for a low L2V mortgage on your next home.

Ms Doubtfire1

The market is a high - sell it.

tradesman

I think you have answered your own question. It is always best to take the money when it is there. Renting can be tough with the wrong tenants. Also taxed on your rental income & time involved. Sell the house & buy something you can add value to ie: build an extension etc. so it will gain in value over time.

Graham

tradesman wrote: »

It is always best to take the money when it is there. Renting can be tough with the wrong tenants. Also taxed on your rental income & time involved. Sell the house & buy something you can add value to ie: build an extension etc. so it will gain in value over time.

Easiest does not necessarily = best.

Granted, renting can be tough if you get the wrong tenants. Not so tough if you get the right ones.

I never did understand the 'earn less money so you pay less tax' approach. I can't think of any other circumstances where people would think it's a good idea.

OP, the answer to your dilemma really depends on:
what your income is
what your income - financial commitments are
what your priorities are; income, cashflow, savings, capital appreciation, security.
your family circumstances and the likelihood they may change
your job security and the likelihood it may change
your future spending plans (new house, college for children etc)

It is probably worth you talking to a professional about the tax implications of anything you're considering.

Tombo2001

You wont get a wrong or right answer here OP.

You will get opinions, and you have no idea how valid these answers are.

Houses could jump 50% in the next 5 years. You were a genius for keeping it.

Houses could fall 50% in the next 5 years. You were mad to keep it.

You don't know which of those two scenarios is more likely, and neither does anyone else here.

pilly

Tombo2001 wrote: »

You wont get a wrong or right answer here OP.

You will get opinions, and you have no idea how valid these answers are.

Houses could jump 50% in the next 5 years. You were a genius for keeping it.

Houses could fall 50% in the next 5 years. You were mad to keep it.

You don't know which of those two scenarios is more likely, and neither does anyone else here.

OP is not looking for expert answers but people's own experience.

wench

Graham wrote: »

If you're prepared for the hassle OP, I'd think about renting. I'd also consider a relatively low B2L mortgage on the rental property to reduce your tax and free up capital for a low L2V mortgage on your next home.

OP couldn't claim a tax deduction for any mortgage interest, as the purpose of the loan wouldn't be to purchase the investment.
Which property it is secured on doesn't matter.

Graham

wench wrote: »

OP couldn't claim a tax deduction for any mortgage interest, as the purpose of the loan wouldn't be to purchase the investment.
Which property it is secured on doesn't matter.

Good point wench, you're absolutely correct.

c98bf0ca

Thanks for replies. It would appear 50-50 split here is similar to my mindset at the moment. I am erring on the side of selling as one poster mentioned the market is good (for sellers) at the moment. We bought during recession and talking to neighbours the most a house in the estate has gone for is €450k in boom time so if we can get €400k+ at the moment I think we will be doing very well. Weighing up losing large CGT relief for marginal rental yields once the taxman takes half and the stress involved in being a landlord I think selling may be the way forward.

trobbin

I'd sell. You've bought a house and the value has increased by well over 100% in the last seven yrs. you said yourself it's nearly back valued at the highest peak of the boom. There's a ton of idiots out there just waiting to sign their lives away and give you their money. Take it while you can!

davindub

c98bf0ca wrote: »

Thanks for replies. It would appear 50-50 split here is similar to my mindset at the moment. I am erring on the side of selling as one poster mentioned the market is good (for sellers) at the moment. We bought during recession and talking to neighbours the most a house in the estate has gone for is €450k in boom time so if we can get €400k+ at the moment I think we will be doing very well. Weighing up losing large CGT relief for marginal rental yields once the taxman takes half and the stress involved in being a landlord I think selling may be the way forward.

CGT will only be on gains from the date you transfer the house to investment property. So you won't lose out on the value gained so far.

I'm not sure of your intention but long term rental/ property price appreciation makes sense. There is some risk in short to medium term but generally property decreases always recover.

That being said you could sell and re-invest in smaller packages etc. Probably the 1st step for you is to book an appointment with a financial planner. No point selling and leaving the money in a bank account.

Mooooo

Talk to an accountant,/ tax advisor. When do ye forsee possible transfer to children? Parent child transfers have a high limit at the moment of something like 350k before cgt kicks in. Then again you could also start a fund with sale proceeds for the kids future. I'd say figure out a rough time line and and then go thru any permutations in terms of what ye want for the future with a professional

jimmycrackcorm

Sell and spread your investments. There are more opportunities to think about. For example you could save lots of tax by maximizing your avc pension contributions and using some of the realize cash to make up the difference.

wench

davindub wrote: »

CGT will only be on gains from the date you transfer the house to investment property. So you won't lose out on the value gained so far.

This is incorrect. The value at the time of moving out isn't part of the calculations. Even if the value stayed the same from now on, the existing gains would gradually become taxable. It is calculated pro-rata for the amount of time as a PPR and as an investment property.
So for example, live in it for 10 years, hold it for 20 as an investment, and roughly 2/3 of any gains would be taxable.

See page 34 here www.revenue.ie/en/tax/cgt/leaflets/cgt1.pdf

davindub

wench wrote: »

This is incorrect. The value at the time of moving out isn't part of the calculations. Even if the value stayed the same from now on, the existing gains would gradually become taxable. It is calculated pro-rata for the amount of time as a PPR and as an investment property.
So for example, live in it for 10 years, hold it for 20 as an investment, and roughly 2/3 of any gains would be taxable.

See page 34 here www.revenue.ie/en/tax/cgt/leaflets/cgt1.pdf

Actually checking my tax manual you are correct, thank you for that, I hadn't planned to revise CGT for a exam on Sat, I might have a look over it again.

Although looking at 30 years past, and assuming a similar pattern going forward ignoring indexation obviously, this would be more beneficial given inflation.

elperello

My approach would be to sell and get mortgage free as soon as possible.

c98bf0ca

Many thanks for all responses