There are many small property investors out there who may be under the false illusion that if the rents are not covering the borrowings i.e there is no cash surplus, then there are no taxes to worry about; nothing could be further from the truth.
Where you make a profit on the rent - you pay income tax.
Whether or not you have any cash left over from the transactions - you still pay LPT.
When yout tenant leaves and is replaced by another still pay the PRTB levy.
If you sell the property and make a profit you will pay CGT
Here below are the do's and don'ts of rental income and expenses.
Gross Rental Income
Residential property in Ireland is normally let on a twelve monthly basis by way of formal lease. This lease document is an important item for tax purposes as it shows what your gross rental income is for that particular period.
You ignore security deposits and do not include them as part of your rental income.
Identify Rental Expenses
Most rental expenses incurred in relation to the property will be allowed for tax purposes either immediately against your rental income, over a period of years, or else against the sale of property if and when disposed of. The expenses must be divided into the following categories:
Tax Allowable Expenses for Immediate Claim
- Interest paid on a loan for the purchase, improvement or repair of the property from the date of the first letting of the property. Note that for residential properties mortgage interest relief is only allowed provided the property is registered with the PRTB from 2006 onwards.
- From the 7th April 2009 tax relief is restricted to 75% of the allowable mortgage interest for residential properties.
- Certain Mortgage Protection Policies.
- Repairs & maintenance.
- Agents letting and rent collection fees.
- Property Management charges.
- Professional fees.
- Legal fees for lettings and rent collection.
- Head rent paid on a lease or ground rents paid in respect of the let property.
- PRTB registration fee but not the NPPR levy.
- Any other expenses not covered above which are not capital in nature
Tax Saving Tip-#1
An area that is often overlooked by investors is the personal costs incurred in dealing with tenants and in collecting rents e.g. motor and travel, phone calls etc. This can be a contentious area with the Revenue. However in practice the Revenue will allow some reasonable level of costs if they can be justified.
Tax Saving Tip-#2
A claim for the cost of mortgage protection policies is another area that is often overlooked. The cost of the premium can be claimed as a tax deduction against the rental income provided it is a death only policy linked to your mortgage with no other benefits attaching.
Tax Saving Tip-#3
Tax Allowable Expenses which are allowed over 8 Years (12.5% rate) include the cost of the fit-out of the property e.g. furniture, electrics etc.
In addition to the expenses listed above, when you purchase a property it may include certain fixture and fittings, which will qualify for the tax Wear & Tear allowance. This is particularly applicable to new properties and refers to built-in furniture e.g. wardrobes, press units etc. central heating, security systems and sanitary fittings. The cost of all these items should be identified for you by the Vendor and you will be entitled to claim a tax allowance thereon against your rental income over a period of eight years. This area is often overlooked by investors.
Non Allowable Expenses against Rental Income
(i) Pre First Letting Loan Interest
Loan interest incurred prior to the first letting of a property is not an allowable tax deduction. This problem only arises on commencement, and normal vacant periods between lettings in the future do not reduce allowable loan interest claims.
(ii) Capital Costs of Acquiring Property
The capital costs of acquiring a property are not an allowable tax deduction against rental income. This relates to the actual cost of the property, legal fees, stamp duty etc.
(iii) Loan Interest
For the tax year 2006 onwards all residential properties must be registered with the PRTB. You will need to retain proof of the registration of the property for inspection by the Revenue if required. This will be a specific request of all Revenue Auditors examining somebody with rental income. Late registrations are accepted by the PRTB, provided you still have the same tenant. Every letting of the property from the 1st January 2006 must be registered.
Where a 100% loan has been used to acquire an investment property, the Revenue have expressed the view that tax relief is only allowed on the part of the loan used to pay for the property. If borrowings have been used to pay stamp duty and other costs it is their view that no tax relief is due thereon.
Replacement loans are another area where problems can arise with the Revenue. Strictly speaking there is no tax relief for a replacement loan if a property is refinanced.
However in practice the Revenue will allow tax relief for replacement residential loans provided the refinancing is for bona fide commercial purposes. From the 7th April 2009 tax relief is restricted to 75% of the allowable mortgage interest for residential properties.
(iv) Improvements v Repairs to Rental Property
Improvements to the property which do not qualify as repairs are not an allowable tax deduction against rental income, whereas repairs are allowable. This can be a very contentious area and sometimes there can appear to be very little difference between what is a repair and what is an improvement.
As a rule of thumb a repair simply corrects or replaces what was already broken or in need of repair whereas an improvement could be replacing something with a completely new item e.g. converting a house into separate apartments. The most common type of house repairs would be as follows:
- Painting and decorating both internal and exterior. Damp and rot treatment
- Mending broken windows, doors, furniture and appliances.
- Replacing roof slates.
(v) Capital Expenditures on Rental Property
Capital expenditure is not an allowable tax deduction against rental income, e.g. extensions/conversions.
Any expenditure on a property which is treated as capital expenditure for tax purposes will be an allowable capital gains tax deduction when the property is sold.
Contact John M Shanahan Accountants for expert advice on
Taxation, Business Management, and Financial matters.