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10 Top Tax Tips - Renting Out Property - Part 1

Greetings from Tramore. Another very promising day here. The washing is on the line, the Super League is dead in the water. Jose Mourinho is gone from Spurs. Another big payoff! I only found out about that on Tuesday night given the furore over the Super League. Greed and avarice took hold of the 12 clubs. It was a shameful betrayal of fans, players, and staff at the various clubs. The president of UEFA wasn't holding back when he called some club chairmen "snakes and liars". Some of the same individuals were supporting changes to the Champions league. Something which they wouldn't be part of with the Super league. As for Mourinho, another huge payday, no doubt. His form is to stay at a club for two years. Do well in year one and not very good in year two. Blame the players, fall out with everyone, and then another massive chunk of money and off to the sunshine. No doubt we will see him in a month or so on Sky telling us about all the offers he has but is waiting for the right job!

Enough of my soccer ramblings. Last week we spoke about getting a stamp duty refund and if you can get a deduction for your labour. In case you missed it Click here

Our most viewed blog over the last year has been pros and cons or renting property in Ireland - see here I had planned to update that, but it is ok except for the commentary on the huge tourism numbers! We wrote it in 2019 when we had tourists and hospitality. I thought it could be more useful to write about 10 Tax tips for property investors. Things that are good to know, especially if you are thinking of investing. We will look at 5 this week and the rest next week.

Joint Ownership

Owning the property with your spouse or civil partner can have positive tax benefits. Especially where one person doesn't use all their lower rate band. Luscious Larry and Foxy Lee are civil partners. Larry isn't working and Foxy is high powered legal eagle working for a top law firm. She is on the top tax rate while Larry has no income. They are looking to buy a property to rent out and think it will make a profit of €20,000 per annum. If Foxy buys this in her name, then her tax liability will be

Rental Profit€20,000
Income Tax40%€8,000
USC8%€1,600
PRSI4%€800
Total Tax52%€10,400



But if they buy the property jointly then Foxy pays tax on €10,000 profit. Her tax liability is now €5,200. Larry's tax liability is as follows

Rental Profit
€10,000
Income Tax20%€2,000
USC [profit less than €13k]nil
PRSI [minimum €500]4%€500
Total Tax€2,500


Their total tax liability is now €7,700 which is €2,700 lower than Foxy's tax liability if she owned the property. See link to Revenue Tax rates and rate bands. click here You will see that the higher income earning spouse/civil partner can earn up to €44,300 at the lower rate. This means that the other spouse/civil partner can earn up to €26,300 at the lower rate. So, if the property was only in Larry's name, then the total tax liability would be lower still. Larry would only pay tax at the lower 20% rate. He would also pay USC, but at a lower rate, and PRSI. But despite the tax advantages it may be more sensible to own it together. If Larry met lovely Linda, Foxy will be on his case. Now, where does she work again?

Losses

Rental losses cannot be set off against other income such as employment income. They are ring-fenced, so they can be only set off against future rental profits. If you have two or more rental properties, the losses from one property can be set off the profits from the other. You need to have separate rental computations for each property. Larry and Foxy let out a gorgeous apartment for €2,000 per month in 2020 and got this for the first 5 months of the year. The tenant left and the property needed a lot of repair work that would take a few weeks to do. With the lockdown, the property was vacant for 5 months and only let again at the start of November. Their rental computation looks like this

Rental Income€14,000
Less Expenses
Repairs€10,000
Mortgage Interest€5,000
Mortgage Protection€500
Insurance€400
Accountancy€600
Rental Loss€2,500


They cannot offset this loss against Foxy's employment income or any other income. They can carry the loss forward to set off against the rental profit for 2021. So, if there was a rental profit in 2021 of €15,000, they would get a deduction of €2,500 and pay tax on €12,500. If they had two rental properties in 2020, they could offset the loss on this against the profit on the other one.

Principal Private Residence [PPR]

A lot of the non-resident clients that we have owned their home in Ireland and went abroad for a few years for work. They let out their home while abroad and would get a letting agent to look after it for them. We have some blogs for non-residents on how they pay tax on their rental profit when they are away. For one of those see here

The key tax points for non-residents with rental property here are

  • You only pay tax at 20% on the rental profit,
  • You only pay USC if the rental profit is above €13,000,
  • You don't pay PRSI,
  • If property is in joint names and one spouse/civil partner is not working, there could be no tax on half the profit

One thing for those who are thinking of going away is PPR relief, should you sell your property in the future. Remember there is no Capital Gains Tax [CGT] on your PPR provided it is your PPR for the entire period of ownership. You will only have CGT if there is a gain on the sale. When you move somewhere else in the country or abroad the house is no longer your PPR. But you can treat certain periods of absence from your PRR as a period of occupation. These are;

  • any period of up to 4 years when you lived somewhere else in the country because of your work
  • any period, irrespective of length, during which you moved abroad to work

You have to live in the property before and after the period of absence for it to qualify as a period of occupation. Belinda & Carlisle bought their dream home in Greystones in January 2012 for €300,000. They lived there until January 2016 when they moved to the US for work reasons. They sold the house in January 2021 for €500,000. The total period of ownership is 9 years. Periods of PPR are 5 years

  • 1 Jan 2012 to 1 Jan 2016 4 years
  • 1 Jan 2020 to 1 Jan 2021 last 12 months

The gain is €200,000. 5 out of the 9 years will benefit from PPR relief. That comes to €111,111, so the balance of €88,889 is liable to CGT at 33%. This comes to €29,333. The last 12 months is always a period of occupation irrespective of living in it or not. I have ignored incidental costs of purchase and sales and personal exemptions for the CGT computation. Had Belinda and Carlisle come back to Ireland and lived in the property again, as their PPPR, there would be no CGT.

Pre-letting expenses

You don't get a tax deduction for expenses incurred before the first letting of your property. Expenses that would fall into this category would include

  • mortgage interest
  • repairs
  • insurance
  • services

But you can get a tax deduction for certain pre-letting expenses such as

  • advertising for tenants
  • legal fees to draw up a lease
  • property management such as tenant finders fees

There is an exception to the rule where pre-letting expenditure is not allowable. This is where a property

  1. Has been vacant for 12 months
  2. Is subsequently let in the period from 25 December 2017 and 31 December 2021

The expenditure must have been incurred in the 12 months before you let the premises. The deduction is subject to a limit of €5,000 per vacant premises. Rodrigo and Gabriela buy a property in September 2020. The property had been on the market since January of that year. They spend €8,000 on painting and repairs before they let the property. If they let the property in December 2020, they won't get a deduction for the pre-letting expenses. This is because it won't be vacant for 12 months. If they let the property in January 2021, it will be vacant for 12 months and so they will get a deduction for €5,000 of the €8,000. This will be a rental expense in their 2021 rental computation. See here  for a link to allowable deductions.

PRSI

When owning a rental property most don't consider the PRSI position. If we look at Larry and Foxy, if Foxy owned the property, she would pay PRSI on the rental profit. As she is an employee, she will pay PRSI on her salary. Because of the way the PRSI system is, she doesn't get any benefit from paying PRSI on the rental profit. She has already made a full PRSI contribution on her salary under Class A. As Larry has no income, he doesn't pay PRSI. Because of this, he may not qualify for state benefits like the state pension. If he has a rental profit of more than €5000 then he will be liable to pay PRSI at Class S. See here about Class S

This is 4% of his profit subject to a minimum of €500. He is now putting himself in a position to make PRSI payments which will count towards state benefits.

Summary

The above is to give you an idea of some tax tips around renting property and moving away from your PPR. We will follow up next week with the second part of this. Everyone's tax circumstances are different. I would encourage you to speak to your tax advisor, so you know the tax impact of renting or investing in property.

Interest in talking to us? Call Deirdre on 051 396703 or contact us. Tell us about you and how we can help.



 

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