Does it pay to be a landlord?
In recent years I have encountered many clients who have reluctantly found themselves becoming landlords, accidental landlords if you like. This can happen for various reasons, some may have outgrown their home for which they overpaid, they are left with no option but to rent it out, as selling is simply not an option. Also, there has been a lot of media coverage recently regarding the taxation of income derived from renting out rooms in your home through online booking sites such as Airbnb.
Is it all worth it financially though? In this article I take a look at your obligations as a landlord and also look at ways to ensure you do not pay any more tax on your rental income, than is absolutely necessary.
Once you are in receipt of any income from the rental of property, you are legally required to file an annual tax return.
There is a misconception amongst some landlords that they only need to file a return with Revenue once you are making a rental profit. This is not the case, it is just as important to file a return and declare any rental losses, as these declared losses can be carried forward against any future profits. Also, what you perceive to be a loss though, might actually be a profit in Revenue’s eyes. If a person’s rental profit exceeds €3,174 in a tax year, they are required to register for income tax under the self-assessment system. If their profit is less than €3,174, they can continue to file a PAYE tax return annually using a Form 12.
As mentioned previously, what landlords perceive to be profit is often very different to Revenue’s. This is mainly due to the fact that Revenue restrict the amount of your mortgage repayments which are allowable as a deduction to 75% of the interest only. However, from 1 January 2016, a 100% interest deduction is allowable where residential property is let to tenants in receipt of certain social housing supports for a period of 3 years.
Nevertheless, there are other allowable expenses that can be used to reduce your rental profit further, some examples include House Insurance, Management Fees, Bank charges, Repairs & Maintenance, Accountancy Fees, Mortgage Protection, Wear & Tear on Furniture.
Once your rental profit (if any) has been established, Tax (40%), USC (5.5%) and PRSI (4%) are potentially due on this profit.
Rent-a-Room Relief – some good news
An individual who lets a room (or rooms) in his or her sole or main residence as residential accommodation may be exempt from income tax in respect of income from the letting, where the aggregate of the gross rents and any sums for meals or other services supplied in connection with the letting does not exceed the threshold for the year in question. You need to consult with Revenue as to how this relief will apply to you and your home.
Other landlord Obligations: As if paying taxes is not enough, landlords do have other obligations to satisfy:
Private Residential Tenancies Board (PRTB)
As a landlord you must register with the Private Residential Tenancies Board (PRTB). This must be done for every new lease or every four years if there has been no change in tenants. Generally, the PRTB will issue reminders of this obligation. If a new lease is registered within two months of the start of the lease, the PRTB’s charge is €90, it doubles to €180 after two months. This expense is allowable as a tax deduction. It’s worth noting that if you do not register the lease with the PRTB, Revenue will not allow you to take a tax deduction for the mortgage interest, which could be very costly.
Local Property Tax (LPT)
The payment of the Local Property Tax falls to the landlord. However importantly, Revenue do not allow this expense to be deducted against rental income.
Building Energy Rating (BER)
Landlords are obliged to obtain and make available a BER certificate for their property. The costs associated with this are tax deductible.
So to conclude, if you already are, or you intend to become a landlord in the future, there are a number of obligations that will most likely result in you paying tax on your “profits”, although in reality you may not be making any money.
Depending on your circumstances there may be more tax efficient means by which to own an investment property, such as within a Self-Administered Pension for example. Whether you decided to hold a property directly, or via a Pension Fund, it is important that you seek Independent professional advice.
Nevertheless, with rents rising, a strong demand for property and a steady increase in property prices, it is not necessarily all bad news!
Gerard O’Brien LL.B LL.M CFP® QFA is a Certified Financial Planner and the Owner of Heritage Wealth, a Financial Planning practice based in Main Street, Midleton, Cork. For more information, contact Gerard at firstname.lastname@example.org www.heritagewealth.ie
Disclaimer: All data and information provided within this article is for informational purposes only. Heritage Wealth Management Limited makes no representations as to accuracy, completeness, suitability, or validity of any information and will not be liable for any errors, omissions or delays in this information or any losses, injuries, or damages arising from its use.