There are very few of us who have not been tenants at some stage. Whether starting college or starting work, or simply because of the hand life has dealt us, most of us have ended up having to deal with landlords at one time or another.
A surprising number of people have also been landlords. Often this happens quite by accident.
We buy a house, and then ask people to share with us and charge them the price of the room.
We might have bought a new place, and had difficulty selling the old house, so that got rented out for a period.
Renting accommodation, whether you have made a conscious decision to invest in rented residential property and benefit from the rent roll, or whether you’ve been an accidental landlord, has its ups and downs.
Nevertheless, the fundamental idea is simple. You provide accommodation in exchange for which you receive money.
Nothing could be simpler. But if the renting process has its own headaches, it’s nothing compared to the mangling the tax code has given to this simplest of transactions.
There is no one explanation for why rented accommodation tax is as complicated as it is.
Part of the reason is that we have used the tax code to adjust the supply of residential accommodation coming onto the market.
This idea really took off in the early 1980s with the so-called section 23 property relief. In a nutshell, section 23 was the law that allowed landlords deduct not just their running costs, but the actual cost of the building itself, when calculating the amount of tax that had to be paid.
Usually this meant that landlords didn’t pay any tax at all on the rents they received from these section 23 properties.
Over the years, there were all kinds of tweaks put onto the scheme. It could apply to holiday cottages for instance, or student accommodation, or residential properties in some towns and city centres.
While the details varied, the fundamental principle was the same, you got tax relief for the amount you spent buying or doing up buildings. And that often was enough to significantly reduce or eliminate the tax bill.
Then there was a backlash. The Government carried out a number of reviews as far back as 2005 on the tax reliefs available in the residential property market, and some action was taken to curtail the reliefs.
That was just before the property crash. With the benefit of hindsight it came too late to mitigate the effect of the property bubble bursting.
Of course the property bubble wasn’t created solely by tax reliefs, but they certainly contributed.
The lasting impact is that ‘Official Ireland’ has a profound aversion to any tax reliefs or incentives on property. Couple this with a deep-rooted suspicion of landlords which is peculiarly Irish thanks to our history and you end up with a very complicated tax regime.
This regime is now tougher on rental income than on almost any other form of money earned or invested.
The current problems in the rented residential property market now are quite similar to those which existed in the 1980s.
Back then, the lack of suitable property prompted the introduction of tax policies to improve the supply of moderate cost-rented residential accommodation.
Those policies created their own supply problems because they lasted too long.
Today, there is no prospect of return to the giveaway tax regime for landlords that characterised the rental market before the crackdown began a decade ago.
No tax relief can address any problems where taxes are not due in the first place.
There is undoubtedly a proportion of the buy-to-let sector where no tax is being paid at all.
This is either because the mortgage interest bills which have mounted will extinguish any profits that could ever have arisen on the rental property, or because the rental income is not being declared.
I suspect there may also be instances where the failure to declare rental income is not primarily down to tax evasion, but rather to conceal income from the property on which the lending bank might feel it has first claim.
But there are other areas where the tax code could be adjusted in an attempt to manage some of the supply issues with the rented property market.
One idea, suggested by the analyst Karl Deeter, would be to provide additional tax relief to landlords who agree not to increase the rents they charge.
That would be for a specified period, Mr Deeter suggests two years. If this plan were to be adopted, even though there might be no increase in the rent being charged, the landlord would see more money after tax.
It’s a clever notion, because it avoids the introduction of rent control and all the difficulties that go along with that, while at the same time giving landlords a strong reason not to increase the rents.
And even though it would be in essence a form of rent subsidy, by reason of its operation, it would be targeted only at tax-compliant landlords who have also registered with the Private Residential Tenancies Board.
The minister for finance has already hinted at measures in the forthcoming budget to improve the housing supply by making it easier for builders in smaller towns and villages to obtain finance.
That is undoubtedly a move in the right direction, but the lead-in time involved, it takes a while to build a house, suggests that measures with more immediate impact are necessary.
Much is made of tenants’ rights, but the accommodation crisis won’t be solved without recognising that landlords should be able to achieve a reasonable return on the investment they have made in housing.
Whatever taxes are due need to be more and straightforward, whether you’re a professional investor or an accidental landlord.
Brian Keegan is director of taxation with Chartered Accountants Ireland
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