Making Cents: The hard truth about being a landlord and tax

THE self-assessed income tax deadline is October 31, if you make a paper return, or November 12 if you file online.

In the run-up to this year’s deadline, much of the focus has been on Airbnb hosts who will have to file a return for the first time on income earned in 2014. But another large group who need to file a return are landlords.

We think of landlords as those who own multiple properties and rent them as commercial enterprises. But individuals or families who have a single property that they rent are also liable.

So, if you inherited a property, or if you bought a property when you were single and you now rent that out, having since purchased a new family home, you are expected to pay tax on the income. This is also the case if you were unable to sell a property, but had to move for family reasons.

Even if you are now yourself paying rent and using the rent on your old home, to cover the mortgage, you are regarded as a landlord and the income is taxable.

If 2014 was your first year in one of these positions (or if you hadn’t completed a tax return for previous years) you need to register yourself as a landlord with the Private Residential Tenancies Board (PRTB) and complete a tax return.

If you are not registered with the PRTB, you cannot claim tax relief on mortgage interest, which is one of the main reliefs to reduce your tax bill on rental income. You can register on paper, but it is quicker and simpler to do so online, at prtb.ie.

You pay tax on the rental income at your higher rate of income tax, so if your earnings push you into the higher bracket, you will pay 40% tax. You must also pay the Universal Social Charge and in January 2014, the Government introduced PRSI to rental income, so higher rate payers will be looking at a total bill of more than 50%.

This is the case even if you are using the rental income to pay a mortgage on the property and have to make up a shortfall, so it is vital that landlords correctly claim for allowable expenses and any reliefs available.

As mentioned above, once you are registered with the PRTB you can claim tax relief on interest paid on a loan for the purchase, improvement, or repair of the property from the date you began letting it. The tax relief is restricted to 75% of the allowable mortgage interest on the property — not 75% of the full repayment, just the element of the payment that is interest. Your annual mortgage statement should tell you what proportion of your repayments relates to interest.

There is a range of expenses relating to the property that you can write-off against your tax, starting with the charge to register with the PRTB. Other allowable expenses include property and contents insurance, property management charges, rates and any ground rents.

You can also write-off money spent on repairs and maintenance. ‘A Revenue Guide to Rental Income’ can be downloaded from revenue.ie and gives a detailed breakdown of all allowable expenses.

Paylesstax.ie also advise customers to investigate what mortgage protection they have, as it may be deductible.

“A claim for the cost of mortgage-protection policies is another area that is often overlooked,” they explain.

“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.”

Another important point if renting out what was previously your home, is that you are no longer entitled to the mortgage-interest relief you received when the property was your primary residence.

The onus is on you to contact Revenue and cancel it — if you don’t, you will have to pay this back to Revenue.

DEAL OF THE WEEK

Another option for anyone interested in reducing their tax bill is to consider making an additional voluntary contribution (AVC).

Better than an SSIA, this extra payment made to your pension will give you a 40% return, if you pay tax at the higher rate, and will boost your retirement fund. Even if you are already contributing to a company pension plan you may not be paying the maximum allowed by Revenue and you can choose to pay more.

The maximum allowable tax relievable contribution you can make depends on your age, subject to an earnings limit. It is capped at 15% of earnings if under 30, rising in bands to 40% if you are aged 60 or above.

So AVCs are particularly effective for employees coming near pension age, as a tax efficient way of saving for retirement. For every hundred euro your put in— effectively, you are getting around €35 back in tax relief.

Your company pension plan may have specific AVC schemes for its members, but if not, you can set up your own independent personal retirement savings accounts (PRSA) into which you pay the AVCs, You can find out more information about AVCs and tax from your payroll manager/ financial advisor, or from revenue.ie and pensionauthority.ie