Revenue Requirements
Once anybody is in receipt of any income from the rental of land or property, in Ireland or abroad, they are legally required to file an annual tax return. There is a misconception amongst some landlords that they only need to file a return with Revenue once you are making a rental profit.
This is not the case, it is just as important to file a return and declare any rental losses, as these declared losses can be carried forward against any future profits. What you perceive to be a loss though, might actually be a profit in Revenue’s eyes, as we will see below.
If a person’s rental profit exceeds €3,174 in a tax year, they are required to register for income tax under the self-assessment system. To avoid any late filing surcharges, their obligations are the following:
Pay preliminary tax by the 31st October for the current tax year
File their tax return by the 31st October the following year on a Form 11, and pay any balance that may be due
Should their profit be less than €3,174, they can continue to file a PAYE tax return annually using a Form 12. Revenue may also allow your client to “code on” their rental profit onto their tax allowances. Effectively, this involves Revenue reducing their tax credits and tax bands, resulting in paying tax due through their employment/pension over the year.
Taxable Profits
As mentioned above, what landlords perceive to be profit is very different to Revenue’s. This is mainly due to the fact that Revenue restrict the amount of your mortgage repayments which are allowable as a deduction to 75% of the interest only.
* Assuming 80% of the full repayment is interest, restricted to the allowable amount of 75% of the interest only.
As you will see the difference between a landlord’s view and Revenue’s view is €480, in just one month. However, other allowable expenses can be used to reduce your rental profit further, examples of just some of these are:
> House Insurance> Management Fees
> Repairs & Maintenance
> Bank Fees & Charges
> Mortgage Protection> Letting Fees
> Accountancy Fees
> Wear & Tear on furniture**
**Wear & Tear at 12.5% is claimable on any fixtures and fittings each year for a maximum of eight years.
There is an exception to the “75% interest restriction rule” from January 2016. 100% of the mortgage interest incurred could be deducted against rental income if the following conditions are met:
The property is made available to tenants on one of the following schemes:
Rent Supplement
Housing Assistance Payments
Residential Accommodation Scheme
The property is made available for a minimum of three years.
Once your rental profit (if any) has been established, Tax (40%), USC (5.5%) and PRSI (4%) are due on this profit. If your client is over 66 years of age, certain reliefs maybe available for both PRSI and USC.
Other landlord Obligations
As if paying taxes is not enough, landlords do have other obligations to satisfy:
PRTB – The landlord must register the tenancy agreement with the Private Residential Tenancies Board (PRTB). This must be done for every new lease or every four years if there has been no change in tenants. Generally, the PRTB will issue reminders of this obligation.
If a new lease is registered within two months of the start of the lease, the PRTB’s charge is €90, it doubles to €180 after two months. This expense is allowable as a tax deduction.
It is important to note that if your client does not register the lease with the PRTB, Revenue will not allow them to take a tax deduction for the mortgage interest, which could be very costly.
Local Property Tax (LPT) – The payment of the Local Property Tax falls to the landlord. However, Revenue do not allow this expense to be deducted against rental income.
Mortgage Interest Relief – In the event where a person begins renting out their own principal private residence, it is important that they immediately cease any mortgage interest relief that they may have been receiving from Revenue. Mortgage interest relief is only available for qualifying owner occupiers.
Building Energy Rating (BER) – Landlords are obliged to obtain and make available a BER certificate for their property. The costs associated with this are tax deductible.
Rent a Room Relief
So the kids have flown the nest, your client finds themselves with empty rooms in their home. Their most prized asset, being their family home, could also become a source of tax free income.
Introduced to increase the availability of residential accommodation, Revenue allow you to rent a room or rooms in your own home without any tax falling due on this income.
In order to qualify the following conditions must be met.
It must be their principal private residence
The income must not exceed €12,000 per calendar year (€10,000 prior to 2015). This includes amount for rent, food, laundry etc. This income must be declared in an annual tax return in order for it to qualify
It is important to note that if your client exceeds the limits set out above, they could be potentially taxed on all of their rental income, not just on the amount that exceeds the limits. There are no requirements to register with the PRTB if renting out rooms in your own home.
So to conclude, if any of your clients are, or intend to become landlords, there are a number of obligations and will most likely result in paying tax on their “profits”, although in reality may not be making any. However, with rising rents, demand for property and a steady increase in property prices, it is not all bad news!