Rental Income – Tax Facts

Rental Income – Tax Facts

If you have a rental property you may wonder how to calculate the profit (please God you have one) or loss on the property.

The first thing to be aware of are that rentals are calculated on a receivable basis so you look at what you get for each month rather that when you get it.
For 2013, say you get €700 for each month but you get the December 2013 rent in January 2014, your rental income is €8,400 for 2013 even though you got the last month’s payment in the next tax year.

The second issue to be aware of is what deductions you can take against your rental income to arrive at your rental profit.
Normal deduction would include the following;

  • Repairs to the property
  • Legal fees on drawing up a lease
  • Private residential tenancy Board fees to register the tenancy
  • Mortgage interest for the purchase, improvement or repair of the property
  • Mortgage protection premiums for the mortgage in question
  • Insurance
  • Advertising for a tenant
  • Letting fees when engaging the services of a letting agent
  • Service charge fees to a management company
  • Accountancy fees for preparing the rental computation

Unfortunately the second property tax, the household charge or the local property tax are not tax deductible

A note of caution on the tax deductibility of mortgage interest. For a residential property only 75% of the interest is tax deductible provided the tenancy is registered with the PRTB [see] . If not registered then you cannot deduct the mortgage interest and this could lead to a much higher tax bill. For non-residential properties the mortgage interest is 100% deductible and there is no PRTB tenancy registration requirement.

Also remember that you cannot reduce the rental income by the cost of furniture and white goods such as tv’s, dishwashers, cookers, fridges etc. However it is possible to get Capital allowances at the rate of 12.5% per annum to reduce the rental profit. Remember to keep back-up for these costs in the event of a Revenue check.

Mario Dee let a residential property in the leafy suburbs of Waterford for €750 per month in 2013. He registered the tenancy in January with the PRTB for €90. His mortgage interest cost for the year came to €4,500 and insurance was €350. He pays €13 per month for mortgage protection on the mortgage. He got a solicitor to draw up a lease agreement for €150. He paid €200 for the second property tax and €75 for local property tax. He had the outside of the property painted at a cost of €800 and the boiler was serviced for €75. In 2012 when he had first let the property he had spent €4,800 on furniture and white goods. His rental computation for 2013 would look like this

Rental Income 9,000

Less Expenses
Mortgage Interest [€4,500 x 75%] 3,375
Mortgage Protection 156
Repairs 875
PRTB Fees 90
Legal Fees 150
Insurance 350

Total Expenses 4,996
Rental Profit 4,004
Capital Allowances [€4,800 x 12.5%] 600
Therefore the taxable rental profit will be €3,404.

Tax Tip!
If purchasing a rental property it may be more tax efficient to have the property in joint names as one spouse could be taxed at the higher tax rate of 41% and the other spouse could be taxed at the lower 20% rate. Tax cost at 41% in the above example is €1,396 but tax cost of having the income in joint names and one spouse is taxed at 20% on a 50% share is €1,038 resulting in a saving of €358. *
*I have ignored the PRSI and USC costs in the above examples and the tax consequence of any potential purchase should be examined prior to purchase

Tax Tip Final [I promise]
If a property purchase is on the radar you might consider completing the purchase prior to the end of 2014. The reason for this is that there is a valuable Capital Gains Tax relief for properties purchased by individuals or companies prior to the end of this year. Once the property is rented and the rental income is returned in the Income Tax return of the individual or the Corporation Tax return of the company and the property is held for a period of 7 years then the gain on the sale is exempt from CGT. The gain is time apportion in that if the property is held for 10 years then 7/10’s of the gain is exempt from CGT and 3/10’s is taxable. This relief applies to the purchase of land or buildings in the State and extends to any EU country

For more tips and advice check out our resources page.