5 Top Tax tips when buying a residential property to let
We ran a couple of recent blogs about whether you should buy investment property in a company or not. Read here On Tuesday of this week I had a consultation with a Tipperary man who had excess funds to invest. He was looking to buy a residential property as an investment. He wanted to find out some of the tax implications of this investment. It’s difficult for me to praise a Tipp man. But he had his homework done and had many questions prepared for our consultation. I want to give you a flavour of some of the main tax tips that could be useful to you. The aim is to give you a better understanding of how this works and the main taxes involved.
Deduction for Mortgage Interest
Landlords can get a full deduction for the mortgage interest. To get this deduction there are two conditions that you have to meet
1. The loan must be for the purchase, repair, or improvement of the property
2. You must register the tenancy with the Residential Tenancies Board [RTB] click here
The cost is €90 once the registration is complete within one month of the start of the tenancy. If it’s after that the cost increases to €180. This cost is tax-deductible so will reduce your rental profit. You must register the tenancy, even if you have to pay the late fee. Otherwise the interest is not deductible. There is also a box on the tax return that you must tick. This is to confirm you have met the requirements of the RTB.
You may get a standalone buy to let mortgage or you could get an equity release from your existing mortgage. For an equity release mortgage, you can apportion the interest cost between the two parts
Brendan purchased a property for €110,000 in November 2018. He first lets the property in January 2019 at €800 per month. To buy this he takes out a top-up on his existing mortgage for €100,000. The balance on his home mortgage at the start of 2019 was €25,000. Let’s assume the interest on the mortgage for 2019 came to €5,000. Then 1/5th of the interest, being €25,000/€125,000 relates to the home mortgage. This leaves 4/5ths, being €100,000/€125,000 for the mortgage on the investment property. So, Brendan will get a tax deduction for €4,000 interest, provided he registers the tenancy with the RTB. The rental computation is beginning to take shape
| Rental Income | 2019 | €9,600 |
| Less Expenses | ||
| Mortgage Interest | 100% | €4,000 |
| PRTB Fee | €90 | |
| Rental Profit | €5,510 |
If Brendan is a high rate taxpayer, paying tax at 52%, and he didn’t register the tenancy it would cost him €2,080.
Purchasing with your spouse or civil partner
Does your spouse or civil partner have no income or have the capacity to earn more income at the lower rate band?
Jim and Bob are civil partners. They own a house in Stillorgan that they let to students for 9 months of the year at €2,500 per month. Jim is currently not working, and Bob has a super job in IT and earns €150,000 per annum. They have no mortgage on the property and we will assume other expenses for 2019 came to €2,500. So, the rental profit last year was €20,000 or €10,000 each.
| Jim’s share | €10,000 | |
| Income Tax | 20% | €2,000 |
| USC | <€13,000 | €0 |
| PRSI | 4% | €500* |
| Total Tax | €2,500 |
* The smallest charge to PRSI is €500 per annum
| Bob’s share | €10,000 | |
| Income Tax | 40% | €4,000 |
| USC | 8% | €800 |
| PRSI | 4% | €400 |
| Total Tax | €5,200 |
Combined taxes for both come to €7,700. If all the profit was Bob’s, then his tax liability would be €10,400. The saving is €2,700.
In most cases, spouses or civil partners would make a joint investment. Yet, in some cases, one person owns the property before the marriage or civil partnership. There could be advantages to transferring the property into joint ownership. Everyone’s circumstances are different so you would need to be careful. Be aware of the home carers credit. This is if one spouse or civil partner has little or no income and is looking after dependants – Read more here
Can you get €5,000 more tax relief?
Under normal tax rules, most expenses you incur before letting are not tax-deductible. You can incur expenses like mortgage interest, repairs, and insurance before you let. If you buy a property in the Summer of 2020 and let it in January 2021 you will incur costs in the intervening period. This could be on painting and other costs to get the property ready for letting.
The previous government introduced a scheme to make more rental units available. This allows a tax deduction for certain costs, up to €5,000, incurred before letting the property. For the landlord to qualify the property has to be vacant for 1 year before first letting. Also, the landlords must let in the period from 25th December 2017 and 31 December 2021. For more information Read here
Normal repairs type expenses and other costs that you get as a deduction would qualify. These would include interest, advertising, utility costs, cleaning, and insurance as an example. Certain Capital type costs would not fall into this category. Costs such as furniture, white good, and improvements to the property wouldn’t qualify. You would get a deduction for these costs in other ways.
Remember there is a clawback in the 4 years from the date of first letting. This applies if you sell the property or it ceases to be residential accommodation in that time.
Property Improvements
You don’t get a deduction for improvement costs against your rental income. They type of costs are enhancement expenditure. This is usually where you are incurring a larger cost on improving the property. You are enhancing the value of the property by making a capital investment. An example of this is converting an attic or garage into another room or adding on an extension. These costs would be a deduction against Capital Gains Tax [CGT] when selling the property. Once the improved asset is part of the property when sold, then the cost would be allowable.
It is important to note the difference between a repair and an improvement. If you fix a pane of glass in your window that is a repair as it is back to its original condition. But, if you take out all your old windows and put in new triple glazed windows that is an improvement. The repair would be a deduction against your rental income. The improvement would be a deduction against CGT.
Betty purchased a property to rent in 2015 for €100,000. She put the property up for sale in December 2019 and she was lucky as it sold immediately. She converted the garage to another bedroom in 2017 at a cost of €12,000. She put in a new air to pump heating system in 2018 for €7,000. She sold the property for €200,000. Auctioneers and legal fees on sale came to €5,000. Legal and stamp duty on purchase came to €3,000. Her CGT calculation would be as follows:
| Sales Proceeds | €200,000 | |
| Less Costs of Sale | €5,000 | |
| Net Proceeds | €195,000 | |
| Less cost price | €100,000 | |
| Less costs of purchase | €3,000 | |
| Less enhancement | 2017 | €12,000 |
| Less enhancement | 2018 | €7,000 |
| Gain | €73,000 | |
| Less Personal exemption | €1,270 | |
| Taxable Gain | €71,730 | |
| CGT payable | 33% | €23,671 |
This tax would be payable to Revenue by the 31st January 2010
Keep Good Records
In Betty’s case, her accountant puts the tax payment through for her in January. He completes her tax return in June 2020 confirming the figures in the CGT computation. After a few days, an assessment issues from Revenue confirming the figures on the return. A month later Revenue issue a “routine” enquiry looking for the computation. The accountant sends this in. Revenue come back and look for the invoices for the heating system and the garage conversion. The accountant gives Betty a call and asks her to forward on the invoices. This takes up an hour of his time. Betty enters into a story of how her cousins’ friend’s neighbour did the garage conversion for cash. Worse still he has now emigrated to Outer Mongolia to breed alpacas. To make matters worse Betty never got an invoice off the plumber. He is in lockdown on a cruise ship recently spotted off the Galapagos Islands. The accountant’s remaining hair is falling out at great speed with the stress of what should be a simple job! Revenue don’t allow a deduction for the garage conversion as there is no evidence to back it up. They are waiting on evidence from the plumber. They raise an extra assessment on Betty for €3,960 plus interest [€12,000 x 33%]. Betty is unhappy with the extra bill and blames the accountant. Revenue are unhappy with Betty but, in truth, blame the accountant. The accountant is envious of the postman calling in every day thinking that would be a nice job!
It is vital to keep proper back-up for all the costs you incur on your property. Often clients own properties over a long period. Revenue may request supporting evidence for deductions you are taking. This could be for your rental computation or CGT purposes.
Conclusion
There was quite a bit in this blog so if you managed to stick with it well done. Before embarking on a property investment please speak to your qualified tax advisor. Everyone’s circumstances are different so an hour of your advisors’ time will be money well spent.
If you need some help in this area please give Deirdre a call on 051396703. Or send us an e-mail contact here and we can start to help you out
