Taxation of Rental Income in Ireland

What is Rental Income?

According to the Revenue’s website, Rental income includes:

• “the renting out of a house, flat, apartment, office or farmland.
• payments you receive for allowing advertising signs or communication transmitters to be put up on your property
• payments you receive for allowing a right of way through your property
• payments you receive for allowing sporting rights such as fishing or shooting rights on your property
• payments you receive from your tenant to cover the cost of work to your rental property. Your tenant must not be required to pay for this work per the lease
• certain lease premiums, as well as deemed and reverse premiums
• Conacre lettings
• service charges for services connected to the occupation of the property
• payments from insurance policies that cover against the non-payment of rent.”

What about Local Property Tax?

According to Revenue, LPT is not a deductible expense against rental income under Section 97 TCA 1997.

According to the Thornhill Group, for Income Tax and Corporation Tax purposes, Local Property Tax should be deductible in a similar manner to commercial rates.  Despite the fact that the Government has accepted this recommendation in principle no further details of when and how this deduction will take effect have been made available.

What is liable to Tax? 

The net profit arising from a rental property is taxed at an individual’s marginal rate of tax being Income Tax plus PRSI plus Universal Social Charge.

In other words, tax is charged on the gross rents receivable less a deduction for all allowable expenses.

It is important to remember that a profit or loss computation must be carried out for each source of rental income.

The rental income on which tax is levied equals the total rental profits less the total losses from all rental sources combined.

Deductions in arriving at net profit include:

• Rates,
• Management Fees,
• Repairs & Maintenance
• Ground Rents
• Certain Mortgage Protection Policy Premiums
• Insurance,
• Legal, Accountancy and Advertising Fees,
• The cost of services provided that weren’t repaid by the tenant including electricity, water charges, refuse charges, etc.
• Wear & Tear on Furniture and Fittings, etc.

A deduction is also available for interest on monies borrowed for the purchase, or repair of the rental property.

For rented residential property, the allowable mortgage interest relief is restricted to 75% for the 2016 year of assessment and is dependent on the landlord registering the tenancy with the Residential Tenancy Board.

For the 2017 tax year, the mortgage interest deduction has increased from 75% to 80%.

The deductible amount will be increased by 5% every year from then on so that by 2021 100% of the mortgage interest will be deductable against the rental income received from qualifying residential lettings.  In other words, the allowable rate will be 85% in 2018, 90% in 2019, 95% in 2020 and 100% in 2021.

The landlord may be able to claim 100% mortgage interest relief. To qualify he/she must:

a)       rent out the residential property for three years to tenants receiving certain social housing supports and

b)       be registered with the Private Residential Tenancies Board (RTB)

In situations where the rented residential property was purchased from the taxpayer’s spouse or civil partner, the interest will not be allowed as a deduction in computing the rental profits. This measure is aimed at preventing married couples and civil partners from generating interest by selling properties to each other and borrowing the necessary funds to do so.

How are Irish Rental Losses Treated?

In situations where a rental loss arises, it can be offset against the rental profit from another property.  If there are insufficient profits for offset then it can be carried forward against future rental profits only.

The order of offset is very important.  The landlord must use Capital Allowances first before offsetting the rental losses carried forward from an earlier year and it is not possible to carry rental losses back to a preceding tax year.

It is not possible to offset rental losses made by one spouse or civil partner against the rental profits of the other.

Losses arising from uneconomic rentals cannot be offset against other rental profits. Uneconomic rentals are defined as those where the expenses will always exceed the income of a particular rental source.

It is not possible to offset rental losses against income generated from other sources including salary, trade income, dividends, deposit interest, etc.

Please keep in mind that foreign rental losses can only be written off against foreign rental income.

What about Pre-Letting Expenses?

The general rule in tax legislation is that any expense incurred prior to the first letting of a rental property is not allowable. The reason being, that such expenses are not deemed to be expenses that relate to a particular lease.  Therefore expenses incurred on buying furniture, painting and decorating the property, etc. before the first letting by its current owner and before the first occupancy by the tenant will not be allowable deductions.

There are, however, two exceptions based on the decision in Stephen Court Limited v Brown (HC 198/2 No 293 S.S.):

a)       Advertising or marketing costs connected with the first rental of the property and

b)       The legal costs incurred in drawing up the first tenancy lease for the rental property.

What is Rent-a-Room Relief?

If an individual rents a room or rooms in his/her sole or main residence and the gross income received does not exceed €12,000 for the 2016 year of assessment or €14,000 for 2017 onwards then no Income Tax, Universal Social Charge or Pay Related Social Insurance will be payable by that individual. In other words, if the rental income does not exceed the annual exemption limit in the year of assessment then the profit or loss arising on the rent will be deemed to be NIL.

Included in the annual exemption limits are payments from the renter/tenant for food, laundry or similar goods and services.

Where the income exceeds €12,000 in 2016 or €14,000 in 2017, the entire amount is taxable.

In situations where more than one individual is entitled to the rent, the annual exemption limit is divided between all the individuals concerned.

It is important to keep in mind that this relief is only available to individuals. In other words it does not apply to companies or partnerships which rent out residential properties.

This relief is available for both individuals who rent as well as individuals who own their own home.

Claiming Rent-a-Room Relief will not affect an individual’s entitlement to mortgage interest relief or Principal Private Residence Relief on the disposal of his/her sole or main residence.

Income from Rent-a-Room must be included in an individual’s annual Tax Return under “Exempt Income.”

The Rent-a-Room Relief will not apply where a child pays rent to a parent.

The Rent-a-Room Exemption is not compulsory.  An individual may elect to have any rental profits or losses from this source assessed under the normal Case V Schedule D rules for rental income.

Filing a Tax Return

All individuals in receipt of rental income must declare this information in his/her annual tax return on or before 31^st October in the year following the year of assessment.

If the rental profit is less than €5,000 it can be declared through the Form 12.

If, on the other hand, the net rental income is over €5,000 the individual will be obliged to register for Income Tax and declare his/her rental income in a Form 11 under the self assessment rules.

Where the landlord is non-resident and in the absence of an Irish resident Agent, the tenant(s) should deduct tax from the rent at the standard rate and pay this tax over to Revenue.  The landlord will be entitled to a credit for the tax deducted by the tenant(s) and must file a Form R185 along with either a Form 11 or Form 12 depending on the amount of rental profit generated.

If, however, the landlord has engaged the services of a Tax Collection Agent in Ireland, this Irish resident individual will be responsible for filing the relevant tax return and submitting the appropriate tax payment on the landlord’s behalf.

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