If you own properties and rent them out, you have tax responsibilities. Your rental income is regarded by the tax authorities as a business, even if it is a small amount. This means you have to complete a self-assessment tax return, calculate any tax you owe, and pay that tax. It can be a complicated area, even for experienced landlords. Here is an overview of what you need to know when it comes to rental income and tax.
You have to pay tax as a landlord whether you rent residential or commercial property. In fact, you are responsible for a number of taxes as a landlord. Tax on your rental income is just one of them. Others include stamp duty when you first buy the property, and capital gains tax on the profits you make when you sell it. The tax you pay on rental income comes under the same rules as income tax.
Rental income is, therefore, taxed at the normal income tax rates. This is either 20 percent or 40 percent, depending on whether you are a standard rate or high rate taxpayer based on your total income. The tax rate on your rental income is calculated on the taxable rental income (taxable rental income is also subject to PRSI and USC).
Taxable Rental Income
In simple terms, to calculate your taxable rental income, you take the total amount of rent you received over 12 months (gross rental income) and subtract any allowable expenses and capital allowances. You then apply your income tax rate to this figure to calculate how much tax you have to pay.
Allowable expenses are expenses related to the management of your rental property. They include:
- Mortgage interest, although how much depends on the type of property. If it is a residential property, you can claim 75 percent, but if it is a commercial property, you can claim 100 percent. The exception is if you have a tenant on social welfare. If the tenant has been in the property for three years, it is possible to increase the claim from 75 percent to 100 percent. Your property has to be registered with the Private Residential Tenancies Board (PRTB) to claim mortgage interest.
- Estate agent and management fees. You can also claim advertising expenses.
- Insurance premiums, including mortgage protection premiums.
- Legal and accounting fees.
- PRTB registration fees.
- Repair and maintenance costs, although you cannot claim for your own time, i.e. you can’t offset the cost of repair if you do the work. Also, you can’t claim the cost of repairs completed before your registered the property as a rental property.
- Services charges, but only if you pay them. An example is refuse collection.
Capital allowances cover wear and tear on items used to furnish the property, as well as any losses you incur on either rental income or the sale of a property. Here are some examples:
- If you buy furniture, you can claim 12.5% of the total cost of the furniture per year for eight years.
- If you make a loss on the sale of a property, you can offset that against the profit made on the sale of a different property.
- If you make a loss on the rental income of a property, you can carry that loss forward to the following year (although you can’t claim it against other income such as income from another business, or PAYE income).
Finally, we have three main tips for landlords to ensure you stay on top of your tax liabilities:
- Keep good records including paperwork on rent received and expenses paid
- Make sure you file your tax returns on time
- Get professional advice from your account
If you need advice, Gilroy Gannon can help. Contact a member of our team today