We’ll look at some tax tips when buying rental property. Last week I introduced you to Timmy and Fidelma Toner. They had a lot of outgoings but got a very nice tax refund for 2023. Enough to fund a good summer holiday on the Algarve and leave their boys at home. They had a combined income of €120,000. Timmy plans on buying a rental property.
The Toners are unsure about the best way to do this so they want our advice. Another factor is Timmy’s mother, Sandra. She owns her home and has savings of about €800,000. Let’s look at
- The Plan
- What way to buy it
- Mortgage Interest
- Pre-letting Costs
- Residential Premises Rental Income Relief
- Summary
The Plan
The plan is to buy a property in Dungarvan for €300,000 and rent it for €1,500 per month. They have €200,000 in savings so they will need to borrow €100,000. A local auctioneer has identified a property for them that costs €280,000. It would need some work to bring it up to letting standard. Timmy thinks it would cost close to €15,000 to furnish it and to repair some plumbing and electrical works.
They spoke to their bank and they’ll get a mortgage to fund the balance. The interest rate is 6% which annoys Timmy a bit seeing he’s not even getting 1% on their money on deposit. Their long-term plan is to have this as a pension when they retire as Fidelma’s pension through work won’t be much. Even moving to Dungarvan when they retire is a possibility. They love the local food festival and use the greenway a lot. Too much in Timmy’s eyes.
What way to buy it?
Their first question is what way to buy it. Timmy thinks it would be better to have it in his name as it would be less hassle for Fidelma. He looks after all the finances and doesn’t want to be bothering her with this stuff. From a tax efficiency point of view, they want to know what’s the best way to do it.
Timmy’s Name
The issue with buying it in Timmy’s name is that he’ll pay tax at 52% of the profit. His salary is €95,000 so he’s in the top Income Tax rate and USC rate. Plus, there’ll be 4% PRSI.
| Rental Income | €18,000 |
| Less Mortgage interest | €4,500 |
| Less Repairs | €500 |
| Less other insurance, tax return | €1,000 |
| Rental Profit | €12,000 |
| Tax Payable 52% | €6,240 |
| Net after taxes | €5,760 |
Joint names
If they buy the property in joint names 50% of the profit is Timmy’s and 50% is Fidelmas. Her income is €25,000 but she can earn up to €33,000 at the lower rate. As a result, she’ll pay 20% tax on her share of the profit. Plus, she’ll pay PRSI at 4% but a lower rate of USC, also at 4%.
| Rental Profit Timmy | €6,000 |
| Tax Payable 52% | €3,120 |
| Net after taxes | €2,880 |
| Rental Profit Fidelma | €6,000 |
| Tax Payable 28% | €1,680 |
| Net after taxes | €4,320 |
Buying the property together saves them €1,440 in taxes each year. Not a huge amount in one year but over 20 years it would be €28,800.
Death
In a death scenario, if either one passed away the other would inherit their spouse’s share. Say Timmy dies. Fidelma would inherit Timmy’s share of the property at the date of his death. She would continue to get the income. If the property was in Timmy’s name only, and he passed away, the property would go into his Estate.
Assuming he left the property to Fidelma, she wouldn’t get the income from the date of death. She would become legally entitled to the property at the date of grant of probate. This could be many months after Timmy passes away.
Mortgage Interest
To get a tax deduction for the mortgage interest they’ll have to register the tenancy. This is with the Residential Tenancies Board [RTB]. Remember this isn’t a deduction for the mortgage repayment but the mortgage interest. If they register the tenancy within a month of the start of the rental period the cost is €40. This is a tax-deductible expense. Late fees apply for each month after that.
If they don’t register the tenancy then they can’t get a deduction for the mortgage interest. This would be an expensive mistake for the Toners as it would cost them thousands. Once registered they will have an RTB number. This is important for the tenants as they may need this number to claim the rent tax credit.
Pre-letting costs
The normal rule is that most pre-letting costs are not allowable. When I say not allowable I mean that you don’t get a tax deduction for them against the rents. Certain pre-letting costs are tax deductible. These include
- Legal fees to put a lease in place
- Advertising of the property to let
- Letting agents fees to secure a tenant
Pre-letting costs, in certain cases, will qualify for tax relief. This applies up to 31 December 2024 where the property is vacant for 6 months before you let it. Before 1 January 2023, the minimum period for which a property must have been vacant was 12 months.
Let’s assume Timmy and Fidelma got a mortgage of €100,000 in April 2024. Of this €85,000 will go towards the purchase cost with the balance to repair and furnish the property. The breakdown of the €15,000 is as follows
| New Patio Door | €1,500 |
| Repair wiring | €4,500 |
| Plumbing repairs | €3,400 |
| Painting | €1,600 |
| Furniture | €2,500 |
| Electrical goods | €1,500 |
| Total | €15,000 |
The previous owner, Mad Mary, passed away on the 31st of January 2024. Timmy has lined up a plumber and electrician for May and June. After that, he’ll get the place painted and the plan is to have it ready to rent by the start of July. But, if they rent it from 1 July the property won’t have been vacant for 6 months. To get the pre-letting costs as a deduction they’ll have to wait and let it from the 1st of August 2024.
What expenses qualify?
Normal rental expenses qualify. These are the usual revenue-type expenses that qualify from the date you let the property. They include
- Repairs
- Insurance
- Letting fees
- Mortgage interest
- Property fees like management, advertising, legal and accountancy
- Costs of services provided like electricity, water, heating, phone
The pre-letting costs that can qualify for the Toners are
| Electrical Repairs | €4,500 |
| Plumbing repairs | €3,400 |
| Painting | €1,600 |
| Mortgage interest pre-letting | €2,000 |
| Total | €11,500 |
| Maximum deduction | €10,000 |
The new patio door is a capital cost. They’d get a deduction for that on any future sale of the property. They’ll get a deduction for the cost of the furniture and electrical goods over 8 years. Capital allowances are a deduction of 12.5% per annum on that €4,000 spend. That comes to €500 and will reduce the rental profit. You get a deduction for that against Income Tax & PRSI, but not USC.
It makes sense for the Toners to wait 1 month and get the €10,000 deduction rather than get an extra month’s rent of €1,500. The €10,000 deduction will create a rental loss in year 1. They can carry that loss forward to 2025 to offset against the rental profit of that year.
Clawback
If they sell or change the use of the property within 4 years of the first letting there’s a clawback. So, they need to rent the property for 4 years. A change of use could be a move from residential letting to an Airbnb rental. Say the Toners love Dungarvan so much they decide to move into the rented house in the Summer of 2027. They wouldn’t have let the property for 4 years from 1 August 2024.
The clawback of €10,000 would apply in 2027 and they would pay tax on that. This would be in addition to any rental profit they have in 2027 up to the final date of letting.
Residential Premises Rental Income Relief [RPRIR]
This relief applies to individual landlords and is worth
- €600 in 2024
- €800 in 2025 and
- €1,000 in 2026 and 2027 or
- 20% of the rental income if lower than the above amounts
So a total of €3,400 over four years. It’s not available to companies, trusts, or estates. To qualify for the relief on the 31st of December in the year for which you claim the relief you must
- Own the qualifying residential premises
- Have a tax clearance certificate and
- Be compliant with Local Property Tax
There are also certain rules that the property must, on that date,
- Be rented under a tenancy registered with the RTB
- Rented to a local authority or
- Actively marketed for rent
You can’t claim the relief if you let the property to a connected person such as a family member or relative.
There is a single relief only. If you own more than one property it doesn’t matter. The most you will get is the set amount each year per the table above.
Clawback
As usual with Revenue what they giveth with one hand they taketh away with the other! There are so many clawback provisions I got tired of reading them all. Among them are
- If you sell the property within 4 years of the first year in which you claim relief
- Change of use of the property eg from a rental to a holiday home
- LPT requirements of all properties are not met
- Tax clearance
Summary
I didn’t get to cover the money that Timmy’s mother has and potential inheritance taxes down the road. I’ll get to that in a future blog, so stay tuned.
You can see that the government is trying to give tax incentives to landlords to stay in the rental market. But if you are giving tax reliefs and credits, then give them and don’t have all these clawback rules. Further guidance is to be issued on the RPRIR. To minimise your taxes it pays to be tax compliant which includes all your Local property taxes.
The pre-letting is a valuable relief and we don’t know yet if they will extend this beyond 2024. Older properties will need some work. Landlords must have their properties up to a certain standard before letting. Properties are subject to inspections to be fit for purpose.
Do you want to make sure your taxes are right? If so, start here
