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“You ask we answer” – Taxation of non-resident Landlords – what is the correct way to return my income?

Things on the political front are quite crazy across the water and the uncertainty isn’t good for anyone, so hopefully a workable solution for all will be the final outcome. Teresa May is one formidable lady and must be under severe pressure. On the sporting side of things the writer is extremely happy about the upturn in fortunes of Man Utd with 8 wins in a row away from home and the type of football that was last witnessed during the Sir Alex Ferguson days. Although PSG gave us a bit of a trimming. The other business partner is not so happy about his beloved Spurs who are dropping points quicker than the mayfly in June. Interesting times ahead for both clubs and the big question can Liverpool do it? If they don’t, there will be serious slagging down the line that could get nasty. Hurling is back with the League in full swing and Tipp will be sick that they somehow managed to snatch defeat from the jaws of victory again!!  If only Brian Cody could get the Ole Gunnar effect and Kilkenny won their first 8 championship games!! On that horrible thought for many we will get on with the business at hand

Non-resident landlord

We have quite a number of clients in this space and it is very interesting to see how they are taxed in Ireland on the property that they have here. They typical case would be a couple who have worked here for a number of years deciding to move abroad and letting out the property they have here. Usually the couple, assuming the property was a family home, would own the property jointly and would let the property through a letting agent when abroad. The tenant pays the letting agent and therefore the tenant doesn’t have to suffer any of the onerous obligations of having to deduct 20% tax on the rents and pay that over to Revenue. This usually works quite well from the landlords perspective too as the agent, not only collects the rent but manages the property to ensure that it is fully let and that any repairs and services needed are looked after.   The tax position has thrown up a few interesting scenarios over the last few years and we have been able to minimise clients taxes on a number of occasions. We will look at a few examples to make sense of what I am saying.

Mike and Tina

Mike and Tina are married and worked and lived in Donegal town. Tina owns a buy to let property there that she lets out through a letting agent for €1000 per month. Despite the beautiful local scenery she can no longer put up with the weather in Ireland and she decides to leave for Australia and for love and honour Mike goes with her. They depart in early January 2018 and, as they are not in Ireland for 30 days or more that year, they are non-resident. In mid-January 2019 Tina takes a break from all the sunbathing and engages an Irish Tax consultant to look after her and Mike’s 2018 Rental computation and tax return.  There is no mortgage on the property and the only expenses are insurance €500, accountancy fees €500 and letting agent’s fees of €1500. Tina spent €4000 in 2018 on new furniture and white goods for the property. She is on a good salary in Australia and earned $150000 [€94000] there in 2018 working down the mines.  Her tax computation should look like this:                    

Tina   
Rental Profit (after costs)9500
Less Capital allowances [€4000 x 12.5%]500
Taxable Income9000
Tax Payable 20%1800
Tax credits  [we will look at this later]144
Net Income Tax1656
USC [nil as taxable profit less than €13000]0
PRSI [No PRSI applies for non-resident landlords]0
Total Tax payable1656


This is an effective tax rate of over 18%. As Mike didn’t own any part of the property then the tax return and tax payment obligation rests with Tina. She is taxed under separate assessment as a non-resident.

Fred and Velma

They departed Dublin at the end of 2017 for the Middle East and were non-resident here in 2018. Fred lands a major job in IT and Velma decides to take a year out and doesn’t work in 2018. They let their principle private residence, through a letting agent, when away at a gross monthly rent of €2500. They own the property jointly. They have a mortgage on the property and paid €6000 in mortgage interest in 2018 and the tenancy is registered with the RTB. Other costs include letting fees of €3000, insurance of €500 and repairs of €500 so total costs are €10000 so there is a rental profit of €20000 on the face of it.  The only change is that for 2018 the mortgage interest deduction is 85% so for tax purposes that is a deduction of €5100. Therefore the profit rental for taxes is €20900. A tax return would need to be filed with Revenue by 31st October 2019 to declare this income and pay the tax owing. Let’s assume Fred is highly organised and decides he will do his own tax return in early 2019 to get this sorted and paid so he completes his return and declares all the income as his own. In this scenario his tax liability would be as follows:                                               

Rental Profit
20900
Tax Payable 20%4180
Tax credits [we will look at this later]nil
USC     120120.5%60
 73602%147
 15284.75%73
PRSI [No PRSI applies for non-resident landlords]0
Total Tax payable4460     


This is an effective tax rate of just over 21%.

The correct treatment of the above scenario is that both Fred and Velma are treated as separately assessed and therefore each should have filed their own tax return and paid tax on their own portion of the rental profit. Remember they own the property jointly. The calculations would look as follows:

Fred
Rental Profit10450
Tax Payable 20%        2090
Tax credits [we will look at this below]nil
Net Income Tax2090
USC [nil as taxable profit less than €13000]0
PRSI [No PRSI applies for non-resident landlords]0
Total Tax payable2090


Velma
Rental Profit10450
Tax Payable 20%2090
Tax credits [see below]1650
Net Income Tax440
USC [nil as taxable profit less than €13000]0
PRSI [No PRSI applies for non-resident landlords]0
Total Tax payable440
Total Tax payable Fred and Velma2530


This is an effective rate of 12%. So by doing the tax return incorrectly Fred has cost them an additional €1930 in tax. Velma would be very unhappy if she knew about this

By correctly splitting the rental profit the couple were able to benefit from a personal tax credit for Velma of €1650 and avoid the USC cost of€280 as both had taxable rental income of less than €13000 and hence are underneath the USC Income threshold. Velma is entitled to the personal tax credit as she has no foreign income, so her Irish and worldwide income is only the rental profit. Fred could be entitled to some %of personal tax credit on the basis of his Irish income compared to his worldwide income. The higher the foreign income is then the Irish tax credit will be lower and may not be worth claiming at all when you consider the time and effort it takes to get all the figures and do the calculation. Let’s look at some examples to show you how this works

Tina
Employment income down the mines 94000
Taxable income in Ireland9000
Worldwide Income103000
Personal Tax credit: €1650 X 9000/103000 =€144


Fred
Employment income in Dubai 189100
Taxable rental profit in Ireland10900
Worldwide Income200000
Personal Tax credit: €1650  X  10900/200000 =€89


Velma
Employment income in Dubai 0
Taxable rental profit in Ireland10900 
Worldwide Income10900
Personal Tax credit: €1650  X 10900/10900 =€1650


While there is an additional time and money cost to completing two tax returns they key points are that

  • By doing separate tax returns Fred and Velma are doing their tax returns correctly
  • The additional costs can be somewhat written off against the rental profits

If you are a non-resident landlord and you need help looking after your Irish Income Tax return to ensure you are doing things right and are not overpaying your taxes please contact one of the team at Comerford Foley and we can have a chat to see if we can help you.

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