These days second-hand apartments with Section 23 tax relief in Dublin are a bit like hen's teeth - few and far between. Most of the bigger city centre estate agents have one or two Section 23 apartments on their books but according to Ken MacDonald of Hooke & MacDonald, those coming on the market amount to "a trickle".

One obvious reason owners are reluctant to sell is the clawback of any Section 23 relief claimed if the property is sold within 10 years. Section 23 was introduced in 1981 with a two-fold aim - to give a much needed boost to the construction industry and to rejuvenate derelict and fringe urban areas. While the suburbs were sprawling fast, Dublin's inner city area was stagnating with a population decline of 52 per cent between 1961 and 1991. In the early 1990s, Section 23 and 27 relief was limited to residential development which resulted in developers exploring the potential of the inner city. Up to recent years, the sale of apartments in rundown areas has been largely dependent on Section 23 investors. The incentive has been significant in bringing rental stock up to European standards and stimulating supply.

Up to April 23rd, 1998, Section 23 relief allowed an investor to write off the interest payable on a mortgage. Following a proposal by Peter Bacon in his first report, the Government curtailed the incentive so that investors have relief on rental income only. To qualify for Section 23 relief, buyers have to let the property for a 10-year period. If, for example, there is an allowance of £100,000 on a property and it is sold within the 10-year period, then that £100,000 allowance passes intact to the next owner for the remainder of the 10 years. The vendor, however, must reimburse the full amount of any tax relief claimed.

The incentive has since been terminated in most designated areas, with only a few new apartments coming on stream in Dublin, which are mostly in recent phases of designated schemes. Rare as second-hand Section 23 apartments may be, there are still a few on the market. So why do some people sell up before the 10-year period ends?

In some cases, the owners may not have claimed the Section 23 relief and consequently are not subject to the clawback. According to Simon Ensor of Sherry FitzGerald, this can happen for a variety of reasons.

"It can occur where people have bought four or five Section 23 properties and may have sheltered their rental income with three of them and do not need to claim the relief on the remaining."

"Also before Bacon I, people could receive rental income up to the amount of interest they were paying and not pay income tax. So, if they were borrowing £100,000 and paying £6,000 in interest, they could receive £6,000 in rent without paying tax, so their income was sheltered by interest relief and they didn't need to go near allowances."

Even if the relief has been claimed, the apartment may have been bought at pre-property boom prices. The value of the apartment may have shot up to the extent that the clawback is not a huge deterrent to selling up, says Johnny Lappin, senior negotiator with Douglas Newman Good. "For example, if an apartment was bought at £45,000, it could now be worth £140,000. If the relief was £30,000 and the vendor has to pay back £10,000£15,000 of this relief, then they are still doing well."

The demise of Section 23 in most designated areas has in many cases boosted the price of those precious few second-hand and new apartments coming on the market that still have it.

"It is not unusual to ask for a premium of 15-20 per cent of the Section 23 allowance. So if the allowance is £100,000, then we might look for £15,000 to £20,000 over and above an apartment that doesn't have it," says Simon Ensor.

He says that while these properties tend to fetch a better price, location is also a deciding factor. "People, as a general rule, will not buy Section 23 purely for the tax breaks unless the bricks and mortar are a good investment. If in a good location, then Section 23s will go extremely well. In a less desirable location, they may take longer. Investors are looking to get tax relief but they are also looking for capital gain."

Most Section 23s are regarded as well-located and highly lettable, says Johnny Lappin. "Anything in the inner city is generally regarded as a good location."

The stamp duty of 9 per cent for investors regardless of purchase price often encourages them to target more expensive Section 23 units on which they will get a better return. Under the Finance Act (no 2) 2000, a landlord can be exempt from the 2 per cent anti-speculative tax if they register their property with the authorities.

According to Johnny Lappin, there is usually a rush for Section 23 properties at the end of the tax year.

"For those with a string of properties, rental income of £500,000 to £1 million a year, they are going to need as many section 23s as they can get. We have an apartment on our books with an asking price of in excess of £290,000, with relief of £200,000. It comes with the contents right down to the teaspoons and a car space. We have had serious investor interest. The 9 per cent stamp duty rate doesn't make that big an impact when weighed up against the Section 23 allowance they are getting."

There is only a handful of schemes in Dublin still releasing new Section 23 apartments. There are still a few left on Scarlet Row in Temple Bar, St Catherine's Close, off Francis Street in Dublin 8, and nearby 125 Francis Street.

Over a decade ago when Section 23 blocks were first offered to the market, people predicted that when the 10-year tax saving period elapsed, the market would be flooded with apartments. So far that hasn't happened.

"The opposite has occurred," says Ken MacDonald of Hooke & MacDonald. "People bought and then held on to them for their own use or for members of their family because of shortage of accommodation. They have increased significantly in value and represent a good investment. It makes good sense to hold on to them."

The fact that there are few new Section 23s coming on stream in Dublin has had implications for the supply of rental accommodation. The level of investor activity in the private rental market in Dublin and throughout the country is very low, largely a result of the 9 per cent stamp duty and the 2 per cent anti-speculative tax.

"If Section 23 hadn't been there, the amount of rental accommodation would be much lower, even though there is still a great shortage," says Ken MacDonald.

emorgan@irish-times.ie