The decision to restore interest relief as a deductible expense when calculating tax on residential rental income reverses a decision taken in April 1998. The measure was introduced following receipt of a report from economist Dr Peter Bacon and at a time when house prices were soaring. The measure was aimed at tilting the balance in favour of owner/occupiers.
Critics said the measure had the effect of driving investors from the market and thereby pushing up rents in the privately rented sector. The measure applied to all mortgages on investment property taken out after its introduction.
The change announced by Mr McCreevy yesterday comes into effect from January 1st, 2002 and will apply to all mortgages.
Mr Liam Kelleher, director general of the Construction Industry Federation, said the change in interest relief was by far the most significant of the two property taxation measures affecting investors contained in the Budget.
The second property taxation measure was a change in stamp duty as it applies to investors in residential property. The changes are beneficial to investors. New reduced rates for investors will apply on transfers of property executed on or after December 6th, 2001.
The change in stamp duty for investors follows a decision taken in 2000 to introduce higher rates for investors. As part of the Finance Act 2000, it was proposed that investors would be subjected to a straight 9 per cent stamp duty rate, irrespective of the price of the house or whether it was new or second hand. The Government decision came after another Bacon report had recommended increased rates for investors but with a sliding scale.
Early this year, as the Finance Bill 2001 was making its way through the Oireachtas and before the new flat rate had been implemented, Mr McCreevy changed the intended policy and announced he would be introducing a flat 9 per cent rate for investors in second hand houses only. This was done against official advice and after intensive lobbying by interested parties.
Mr McCreevy replaced the proposed flat 9 per cent rate for new houses with a sliding scale which was harsher than that which applied to owner-occupiers. He also abolished a proposal to introduce a three-year 2 per cent, anti-speculation tax for investors.
The changes announced yesterday mean that, for second hand residences, investors and owner-occupiers who are not first-time buyers, will pay equal stamp duty.
Mr Kelleher said the effect of the change in charging interest against tax was that investment in residential property was now as attractive an option as investment in commercial property. He expected the measure would have "an immediate positive effect" on the market.
Mr Ciaran Ryan of the Irish Home Builders Association said he hoped rents would now come down "very quickly". He said the change in charging interest against tax would have a positive effect.
