How to Calculate Your Rental Income
1 Identify Gross Rental Income
Residential property in Ireland is normally let on a twelve monthly basis by way of formal lease. This lease document is an important item for tax purposes as it shows what your gross rental income is for that particular period.
You ignore security deposits and do not include them as part of your rental income on receipt and do not treat them as an expense when and if refunding them. If you do not return a security deposit and use it to meet the cost of repairs then you should include it as rental income and claim a tax deduction for the cost of the repairs.
If your property is not let under a formal lease you should take into account the rents due to you for the period in question.
2 Identify Rental Expenses
Renting out a property is like running a business and most expenses incurred in relation to the property will be allowed for tax purposes either immediately against your rental income, over a period of years, or else against the sale of property if and when disposed of. Like a business your expenses must be divided into the following categories:
a. Tax Allowable Expenses for Immediate Claim
- Interest paid on a loan for the purchase, improvement or repair of the property from the date of the first letting of the property. Note that for residential properties mortgage interest relief is only allowed provided the property is registered with the Private Residential Tenancies Board. This applies from the tax year 2006 onwards.
- Tax relief is restricted to 85% of the allowable mortgage interest for residential properties for Tax Year 2018 (75% for 2017). From 1 January 2019 interest accruing on such loans is fully deductible as a rental expense.
- Insurance of Property and Contents.
- Certain Mortgage Protection Policies.
- Agents letting and rent collection fees.
- Property Management charges.
- Professional fees including the paylesstax.ie membership fee.
- Legal fees for lettings and rent collection.
- Head rent paid on a lease or ground rents paid in respect of the let property.
- PRTB registration fee but not the NPPR levy.
- Any other expenses not covered above which are not capital expenses.
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An area that is often overlooked by investors is the personal costs incurred in dealing with tenants and in collecting rents e.g. motor and travel, phone calls etc. This can be a contentious area with the Revenue as there is no specific tax allowance for these. However, in practice the Revenue will allow some reasonable level of costs if they can be justified in your own particular circumstances. For example if you have one property and the rents are paid by direct debit it would be hard to justify a claim for personal expenses for dealing with the letting. On the other hand if you have multiple units and have to collect weekly rents from tenants then a claim could be made for expenses incurred in doing so.
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A claim for the cost of mortgage protection policies is another area that is often overlooked. The cost of the premium can be claimed as a tax deduction against the rental income provided it is a death only policy linked to your mortgage with no other benefits attaching.
b. Tax Allowable Expenses Allowed over 8 Tax Years
The cost of the fit-out of the property e.g. furniture, electrics etc is allowed for tax purposes over a period of eight years at a rate of 12.5% per annum. This is known as a Wear & Tear Allowance.
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In addition to the expenses listed above, when you purchase a property it may include certain fixture and fittings, which will qualify for the tax Wear & Tear allowance. This is particularly applicable to new properties and refers to built-in furniture e.g. wardrobes, press units etc, central heating, security systems and sanitary fittings. The cost of all these items should be identified for you by the Vendor and you will be entitled to claim a tax allowance thereon against your rental income over a period of eight years. This area is often overlooked by investors.
c. Non Allowable Expenses against Rental Income
(i) Pre First Letting Loan Interest
Loan interest incurred prior to the first letting of a property is not an allowable tax deduction. This problem only arises on commencement, and normal vacant periods between lettings in the future do not reduce allowable loan interest claims.
(ii) Capital Costs of Acquiring Property
The capital costs of acquiring a property are not an allowable tax deduction against rental income. This relates to the actual cost of the property, legal fees, stamp duty etc. However, refer to our post on Special Tax Reliefs for Property Investment for details of tax allowances for certain properties, e.g. Section 23 Properties.
(iii) Loan Interest
For the tax year 2006 onwards all residential properties must be registered with the Private Residential Tenancies Board to qualify for tax relief on mortgage interest. You will need to retain proof of the registration of the property for inspection by the Revenue if required. This will be a specific request of all Revenue Auditors examining somebody with rental income. Late registrations are accepted by the PRTB, provided you still have the same tenant. Every letting of the property from the 1st January 2006 must be registered.
Loan interest for the purchase, improvement or repair of a rental property qualifies for tax relief. The type of finance chosen at the commencement of the mortgage needs to be carefully considered. Interest-only loans and pension-backed mortgages are very useful methods of minimizing your tax liabilities over the term of the loan. Professional advice on this area should be sought before committing yourself to any mortgage. We can provide advice on this matter by way of consultation.
Where a 100% loan has been used to acquire an investment property, the Revenue have expressed the view that tax relief is only allowed on the part of the loan used to pay for the property. If borrowings have been used to pay stamp duty and other costs it is their view that no tax relief is due thereon. The rules regarding allowability of interest as a tax deduction are very narrow and this would need to be borne in mind when dealing with 100% loans.
Replacement loans are another area where problems can arise with the Revenue. Strictly speaking there is no tax relief for a replacement loan if a property is refinanced. However in practice the Revenue will allow tax relief for replacement residential loans provided the refinancing is for bona fide commercial purposes and not part of a plan to avoid tax. For commercial property loans Revenue clearance should always be obtained in advance of a refinancing of an existing loan to ensure that tax relief will be allowed on the replacement loan.
From the 7th April 2009 to December 2016 tax relief is restricted to 75% of the allowable mortgage interest for residential properties.
For tax year 2018 tax relief is restricted to 85% of the allowable mortgage interest for residential properties. From 1 January 2019 interest accruing on such loans is fully deductible.
(iv) Improvements v Repairs to Rental Property
Improvements to the property which do not qualify as repairs are not an allowable tax deduction against rental income, whereas repairs are allowable. This can be a very contentious area and sometimes there can appear to be very little difference between what is a repair and what is an improvement. As a rule of thumb a repair simply corrects or replaces what was already broken or in need of repair whereas an improvement could be replacing something with a completely new item e.g. converting a house into separate apartments. The most common type of house repairs would be as follows:
Painting and decorating both internal and exterior
Damp and rot treatment
Mending broken windows, doors, furniture and appliances
Replacing roof slates
(v) Capital Expenditures on Rental Property
As already mentioned, capital expenditure is not an allowable tax deduction against rental income, e.g. extensions/conversions.
Any expenditure on a property which is treated as capital expenditure for tax purposes will be an allowable capital gains tax deduction when the property is sold.
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