Remaining Section 23 schemes in Dublin sure to attract investors
Irish Times, 15th Jan 2004.

Location and potential rent returns are key considerations before buying a Section 23 tax incentive property. Kate McMorrow reports and right, looks at developments available all over the city.

By far the most popular investment option in 2003, Section 23 properties were snapped up as soon as they appeared on the market. Dublin city centre locations were the most sought-after, providing solid rental income and potential for capital growth. The year promises further hectic activity in this sector, especially since these attractive tax-breaks are coning to an end in July 2006 (provided the Government doesn’t change its mind, which it has done in the past).

A misunderstanding has arisen over the two-year extension granted in the last Budget for Section 23 properties. The public could be forgiven for believing that supply will increase. Not so. All the extension means is that builders now have more time to finish schemes already in the pipeline. The current Section 23 scheme has been the most successful ever introduced in this country.

Everybody wins. Buyers pay less tax, unsightly run-down areas of the city receive a face-lift and large areas of the city centre are re-populated. Trendy cafes and pubs are springing up in the most unlikely places, a by-product of the influx of young professional tenants with good spending power.

Section 23 pioneers, like those who bought into Custom Hall, a Cosgrave development on Gardiner Street, Dublin 1 launched by Hooke & McDonald in November 1992, have contributed to the rejuvenation of this once beleaguered area. Today’s investors just have to visit the lively IFSC area to see how designation can transform and re-vitalise a location.

The Cork Street area is expected to change just as dramatically in the coming years. Also the north-east inner city around Talbot Street, Ballybough and Summerhill. Liberty Corner, a new dance centre, is planned on James Joyce Street off Foley Street near Connolly Station.

Main Street, Ballymun seems an unlikely address to target just now but, with a revamp, expect great changes. It is close to Dublin City University and the airport for letting, and a short bus ride from O’Connell Street. Investors or straightforward buyers are wise to take a long-term view of Section 23 schemes currently for sale or due to come on the market in the New Year. Prices may be slightly higher than other properties on offer in the area, but the tax bonus could more than cover this.

Under Section 23, owner occupiers qualify for tax relief on 50 per cent of the net purchase price over a 10-year period, minus the cost of the site. In a prime Dublin location, site costs are high, but the saving on tax is still worthwhile. If, for example a qualifying investment property costs €300,00, with site costs of 20 per cent, this provides and additional tax free sum of €12,000 per annum for 10 years which the buyer can earn from all sources.

Many designated areas of the city have a run-down look just now, but once urban renewal plans area a reality, early buyers could be sitting on a good lump of equity. The same principle applies for investors, who can set income from all rented properties in this jurisdiction against tax for 10 years.

Section 23 has had particular appeal to those who have a sizable portfolio of rental properties in this country. The tax breaks need not be fully used in the first 10 years, but can be carried over if not availed of. Alternatively, the tax relief can be claimed in full in year one if the investor has sufficient rental income to offset the allowance against it.

The particularly poor performance of pension schemes in recent years has encouraged many small investors towards property as a way of topping up their pensions. Equally young investors can build up a portfolio of rental properties which will be paid off by the time they retire, leaving a substantial mortgage-free income. Availing of Section 23 will make repayments easier along the way.

Structuring a mortgage to get the maximum tax advantage is crucial for either owner occupiers or investors. It reaps dividends to seek advice from an independent broker before buying, particularly if borrowings are tight. Interest-only loans will ease repayments, with the capital paid back at the end of the term through a separate pension or insurance scheme. Alternatively, an interest only loan can be altered after a few years when finances ease.

Typically, buyers can borrow up to 85 per cent of the price of an investment property. If the buyer has spare equity in another property, that can be used to fund the deposit, making the next, some in favoured city centre locations. Location is crucial in terms of rental potential, with city center developments the strongest choice. Buying close to a college, hospital or office park is also a good option.

Look to areas “on the way up”, such as Ballymun which is currently undergoing a major revamp, or Cork Street where the Digital Hub has been sited. The Talbot Street area is chaotic just now with Luas construction work, but you can’t get more central than this and the area is expected to improve.