Is rental income liable to tax?
Residential property investment is a business, and like any business is liable to taxes. As a landlord you must file a tax return even if you only have one property and make a loss. Many landlords make a loss but still end up paying tax due to the penal way rental income is treated for tax purposes.
How is the tax on rental income calculated?
Rental Income is taxable under the Irish tax system. For most cases of rental income, the amount taxable can be calculated as follows:
Gross Rental Income less Allowable Expense less Capital Allowances = Taxable Rental Income.
What expenses can I offset against tax?
Certain expenses incurred may be used to reduce the income tax liability on rental income, these include:
· Qualifying mortgage interest (currently 75%)
· Management fees
· Advertising expenses
· Estate agent fees
· Insurance premiums
· PRTB tenancy registration fee
· Legal fees for drawing up leases
· Mortgage protection policy premium
· Accountants fees for preparing rental accounts
· Refuse and other service charges – if paid by the landlord
· Cost of repairs and maintenance – this covers repairs and general maintenance of a property, however it is not possible to claim for your own time, for example, cutting the grass
· Wear and Tear
How is tax on rental income paid?
Profit on rent is taxed on an actual tax year basis. Individuals taxed under the PAYE system who have rental profits must make a tax return under the Self Assessment system. Your accountant can complete this tax return for you.
What records must be kept for tax purposes?
You must keep full and accurate records of your lettings from the start. You need to do this whether you send in a simple summary of your profit/ loss, prepare the accounts yourself or have an accountant do it for you. All supporting records such as invoices, bank statements, cheque stubs, receipts etc should be retained. You must keep your records for six years unless your revenue office advises you otherwise.
When must the tax return be made?
The return must be made by October 31st of the following year. For example a tax return for rent received in 2014 must be made by 31st October 2015
What expenses cannot be claimed for?
· Pre-letting expenses i.e. expenses incurred prior to the date on which the premises was first let apart from auctioneers letting fees, advertising fees and legal expenses incurred on first lettings.
· Post letting expenses i.e. expenses incurred after the period of the last letting are not allowable
· Expenses incurred in the letting of premises on an uneconomic basis are not deductible.
Expenses incurred in the period between lettings are deductible provided the landlord was not in occupation of the premises during the period and a new lease is granted.
Do I need an accountant?
There is no requirement to use an accountant to file a tax return. However it is advisable to use one as they are familiar with the tax rules and can in some cases save you money.
How can I reduce my costs?
Residential property investment is a business activity and like any business, costs should be tightly controlled and reduced where possible. A landlord can cut costs and improve the financial return on his investment by focusing on the following:
· Get the best mortgage deal
· Avoid rental voids
Review your mortgage and insurance costs at least once a year to ensure you are getting the best available rates.
How are non resident landlords taxed?
On receipt of the annual tax return, profit from rent i.e. rent received less allowable expenses will be assessed. The landlord is entitled to claim relief for expense, which are usually allowed in arriving at the rental profit. The landlord is also entitled to a credit for the tax deducted by the tenant. Form R185 should be submitted by the landlord with the tax return to obtain credit for the tax retained.
What is the rate of capital gains tax?
Profits from the sale of an investment property are liable to capital gains tax at a rate of 33%. The chargeable gain is calculated by deducting any allowable expenditure form the amount realised on the disposal (sale).
The allowable expenditure may include:
· The cost of acquisition of the property and any costs of acquisition such as solicitors / auctioneers fees
· Any costs incurred in improving the value of the property
· Any costs of disposal such as solicitors / auctioneers fees
Expenditure on the costs of acquisition and improvement may be adjusted to take account of inflation. Where a disposal is made on or after 1st Jan 2003, the indexation relief will only apply for the period of ownership of the asset up to 31st Dec 2002. No relief is due if the period of ownership is less than 12 months.
Consult your accountant for more details
Is rental property an easy way to make money?
Investors should always take a long-term view with property and they should realise that buy-to-let is not a "get rich quick" scheme. Property can generate income over time but there are many pitfalls for the unwary. The days of rapid double digit capital appreciation are gone. This combined with a tougher lending environment has put an end to the days of easy investment returns from residential investment property.
As with any investment always proceed with caution and do your research first. Always consider the downside - what's the worst that can happen? Can you afford the mortgage repayments if the property is not rented?
Do I need special insurance for a rental property?
Do not under estimate the importance of having the right insurance for your investment properties. Some landlords make the mistake of relying on normal household cover – this is not adequate. An investment property requires specific ‘buy to let’ insurance.
The key considerations when choosing an insurance policy for your investment property are:
· Third Party Liability
· Building Cover
· Contents Cover
· Loss of Rent Cover
Always remember to check what excess applies to the policy you are considering. The excess is the amount you must pay when making a claim and this can vary from policy to policy.
Always shop around - if you have a number of investment properties negotiate with your insurer and see if they will give you a bulk discount!
How much should I insure my property for?
Always check you have sufficient buildings cover. Guidelines on how to estimate the rebuilding costs for various types of residential properties in different parts of the country can be obtained from the Society of Chartered Surveyors (www.scs.ie).
Remember the rebuilding cost is not the same as the market value of the property.
Where do I get insurance cover?
There are now a large range of insurance companies offering buy-to-let insurance. The number has increased in recent years and the market has become more competitive. Choose a broker that has experience of buy-to-let policies, they will know what a landlord’s policy requirements are, and if there is a claim they have the experience to help. Always shop around - a number of web-sites now offer on-line quotations for buy-to let landlords.
Can I get insurance cover for loss of rent?
Most insurance polices for investment properties now include cover for loss of rent if the property is badly damaged or destroyed and this results in the property being unsuitable for occupation by tenants. As most landlords rely on the rental income to cover their mortgage payments, it is vital to ensure this cover is included on your policy.
What insurance is required for apartments?
In an apartment building, the building insurance should be covered by the annual management fee – check with the management company. It is still advisable to take out a separate policy to cover third party liability, loss of rent and contents cover.