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Top Tax Tips - Renting Out Property- Part 2

There's a spring in the step of the Tramore seagulls this morning. They have heard about the abolition of the inter county travel ban. More people equals more food. Happy days. Hair will get back to normal in two weeks and we will be more beautiful again. Bouncers that worked in pubs could get a start with hairdressers, shops, and churches. It has been a very positive week on the vaccination front. My stepmother got an appointment in Kilkenny and was in and out of Cillin Hill within 45 minutes. It's great to see the registrations opening for the over 50's soon. I am not in that age bracket yet, but not far off it either.

Last week we had Part 1 of our Tax Tips when letting property. In case you missed it See here

This week we will look at 5 other Tax Tips that can be useful to know in this space.

Travelling Expenses

Charlie and Lola live in Dungarvan. They used to live in Galway where they bought a buy to let as an investment in 2014 for €150,000. The property needs some minor repairs. Charlie is going to paint the property over the next two weekends and travel up and down on both Saturdays. This is a round trip of 420km so a total 840km over the two weekends. Charlie does his tax return and puts in a mileage claim for this travel. He looks up the rates on the Revenue website click here and sees that for the first 1,500km the rate is 44.79 cents. He also notices on the same page the Revenue approved subsistence rates. As he was away from Dungarvan for more than 10 hours he claims a deduction for a day allowance for each day. His figures are

840km44.79 cents€376
2 days +10 hours€36.97€74
Total€450

Charlie is incorrect. He cannot claim mileage for the travel incurred to repair his property. He can claim actual expenses of travel incurred, so he could claim his diesel costs for the trip. He kept two diesel receipts that came to €90. He could also claim a proportion of motor tax, insurance, and car repairs. But the proportion would be very small as he spent 2 days out of 365 days travelling to the rental property. It may not be worth the time and effort of doing the calculation. He wouldn't get any deduction for the subsistence expenses. Charlie has overclaimed expenses by €360

If you have a property abroad the travel must be wholly and exclusively for renting the property to get a write-off. If there is a personal element, like a holiday, then no part of the travel is an allowable deduction.

Enhancement Expenditure/Own Labour

This was part of a recent blog we did see here

Charlie recently got a painter into his own house in the leafy suburbs of Dungarvan. He paid the painter €25 per hour. As Charlie is not a painter, he thought a fair hourly rate for his time would be €20 per hour. He worked 16 hours over both Saturdays. He included an expense of €420 into repairs in his rental figures for his labour and paint.

Again, Charlie is incorrect here. He can't include a cost for his labour as this isn't an expense he has incurred. If he paid a painter and incurred an expense of €600 then he could claim that cost. He can claim the cost of the paint. He has overclaimed repairs by €320.

Charlie and Lola are big into the environment. In 2016 they installed solar panels on the roof of their property in Galway. This cost them €10,000. The Salthill seagulls took a shine to the panels and they held daily meetings there. They left a mess and there was a lot of cleaning and repair work with them. They decided to remove the panels and install an air-to-water heat pump instead. This would cost them €15,000. They are thinking of selling the property as it has gone up in value. It is now worth €260,000. Charlie calculates the estimated Capital Gains Tax as follows

Sales Proceeds€260,000
Less costs of saleLegal, auctioneer, accountant€5,000
Net Proceeds€255,000
Less Cost€160,000
Stamp Duty & legal fees€3,000
Less EnhancementSolar Panels€10,000
Less EnhancementAir-to-heat€15,000
Gain€67,000
Capital Gains Tax33%€22,110

 

Most of Charlie's figures are correct. But he has overclaimed his deductions by €10,000. The cost of the solar panels is not an allowable deduction. The solar panels are not part of the property at the time of selling. The air to water heat pump system is part of the property and it is correct to take a deduction for that cost. Because of this, the gain should be €77,000 and the CGT will increase by €3,300 to €25,410. But see below.

Foreign Rental Property

If you own a property outside of Ireland and rent that, then the income is liable to tax here. This is on the basis that you are resident and have your permanent home here. If so, you pay tax here on your worldwide income. It is very likely that you will also pay tax in the country where the property is. That country will have primary taxing rights over the property. You will have to do a tax return and rental computation in that country and will need specialist help. The issue is that you will pay tax in the country where the property is and in Ireland. There are two rules to remember

  1. If Ireland has a double tax treaty, then you can get a deduction for the foreign tax against the Irish liability
  2. If Ireland doesn't have a tax treaty, then you can get a deduction for the foreign tax against the rental income

Lola is from Granada in Andalusia. Charlie loves it over there. Eating tapas and drinking red wine under the Spanish sun, after his siesta, is pure bliss for him. Lola inherited an apartment there in 2010 when her dad Javier passed away. She rented the property in 2019 and made a profit of €5,000. She paid €1,000 Spanish Tax on this

When completing her rental computation here she must do so using Irish tax rules. Her Irish tax liability on the rents comes to €2,600. She will get a deduction for the €1,000 tax she paid in Spain. Her net tax liability here will be €1,600. See the list of countries that Ireland has tax treaties with Click here

If the property was in downtown Lima in Peru the position is different. Ireland doesn't have a tax treaty with Peru. If she paid €1,000 in Peruvian tax, then she would get a deduction for that. Her rental profit would decrease from €5,000 to €4,000.

Capital Allowances

When Charlie and Lola bought the property in Galway, they spent €10,000 on the following;

  • Dining room table and chairs
  • A suite of furniture for the sitting room
  • TV, fridge freezer, washing machine, dishwasher, cooker and dryer
  • Beds, wardrobes, mattresses, lockers, lamps
  • Carpets, blinds and curtains

Charlie read that he couldn't claim a deduction for the cost of furnishing the property. Finally, he got something right, or did he?

When completing his rental computation for 2014 he didn't claim anything for the cost. He could have claimed Capital Allowances at 12.5% per annum for 8 years. This is €1,250 per annum. This would help Charlie and Lola reduce their Tax and PRSI on the rental profit but not USC. Assuming top rate tax of 40% and 4% PRSI this would be an annual saving of €550. Over 8 years this comes to €4,400. If you rent the property for part of the year, like the first year, then claim a proportion of Capital allowances. If they rented it from the start of May 2014 [8 months] then they would get Capital allowances of €833 in 2014. This is €1,250/12 x 8.

Sometimes these calculations can get a bit tricky. Especially if you change the furniture and equipment within the 8 years. It's important to keep good paperwork, so you have backup for the costs.

Capital Gains Tax exemption

If you have lasted this far well done, we are almost there! We know that Charlie and Lola are planning to sell the property with the upturn in the market. They bought it in early 2014 and now own it for 7 years. Charlie’s friend George is a solicitor and told him that he may not have to pay any Capital Gains Tax on the sale. Excited with this news Charlie buys a bottle of Rioja and a tortilla from Tesco’s to celebrate. He likes George a lot more than before and makes a mental note to buy him something from the Lidl homeware section. George is right. Where you bought a property or land in the period from 7 December 2011 to 31 December 2014 there is CGT relief. The initial relief was that you had to hold the property for 7 years but that reduced to a 4 year holding period. The 4 years rule came into play for disposals from 1 January 2018.

On the basis that they own it for 7 years when they propose to sell it then there would be no CGT. In this case not getting a deduction for the solar panels is not an issue as there is no CGT. If they don't sell it now and decide to sell in 3 years, at the start of 2024 then 7/10ths of the gain wouldn't be liable to CGT.

Gain€77,000
Relief7/10€53,900
Chargeable Gain€23,100
Tax Payable33%€7,623


As you will see this relief has saved them a large chunk of CGT.

Summary

The tax tips this week and last are a bit of a whistlestop tour of some of the main taxes concerning property rental. We see it so often here how everyone's taxes are different and so personal to their circumstances. Please talk to your tax advisor so that you know how investing in property impacts your taxes.

Interested in talking to us? Call Deirdre on 051396703 or contact us. Tell us about you and how we can help.



 

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