We will look at some tax tips for accidental landlords. We all hear about landlords exiting the market in their droves. A perfect storm of rising interest rates, rent pressure zones, and plenty of red tape. The tax system here can quickly squeeze out the already squeezed middle.
The purpose of this is to help you understand the taxes you have and what options can help you. I had a meeting with a client recently. She was hoping to get out of the rental market owing to the crippling cost of the mortgage on the rental. I will use that as a Case study to explore some of the issues. We will look at
- Introduction
- Minimise Taxes
- Actual Cash Position
- Tax Tips
- Looking forward
Introduction
Boris and Florence Johns, Bojo and Flojo to their friends, live in a 3-bedroom semi in Tipp town. Bojo is originally from Kerry and his dad has some land there. It is May 2020 and Covid has changed things. Both are working from home so they could move to Kerry and have the support of family there. The free site is a help, and they decide to build their dream home.
Roll on to October 2021. The new home, while not finished, is habitable and they plan to make the big move over the bank holiday weekend. Flojo owns the house at number 37 The Ferns in Tipp town. Her mate Stacy is a very capable lady and she’ll look after the rental. There is no problem finding a tenant and Stacy lets it for €1200 per month from 1 November 2021.
Flojo has a tracker mortgage on the property. The rental income will cover the mortgage repayment of €800 and leave her with a small profit. She understands that she’ll have a tax liability but isn’t too sure how it works.
Minimise Taxes
The key to minimising taxes is to claim everything you can to ensure the rental profit is as low as it can be. Stacy registers the tenancy with the RTB. Good on her because that’s a necessity to ensure that Flojo gets a deduction for the mortgage interest. Other deductible costs include
- Estate agents fees
- Service charges
- Repairs
- Mortgage protection payments
- Letting fees
- Insurance
- Lease agreement fees
- Accountancy fees
- Capital allowances on furniture and white goods
Year 1
Year 1 of the rental is 2021 for Flojo. Her rental computation looks like this
| Gross Rental Income | €2400 |
| Less Expenses | |
| Letting fees | €246 |
| Mortgage Interest Nov & Dec | €800 |
| RTB fee | €90 |
| Mortgage Protection 2 x €15 | €30 |
| Insurance €400/12×2 | €67 |
| Boiler service | €100 |
| Rental Profit | 1067 |
Given that the profit is less than €5000 Flojo must return the rental profit on a Form 12. She can do this on myAccount. She files her Form 12 in 2022. The taxes on the rental profit, at 48%, come to €512. The final tax liability for 2021 is €312 as Flojo claimed €1000 of medical expenses. Revenue collect the money by reducing her tax credits in 2023 and 2024 by €156 each year.
Year 2
Year 2 is her first full year of rent. With the hike in interest rates, the mortgage repayment went up to €1000 a month. The rental was costing her money and that was before the tax liability. Her rental computation looks like this
| Gross Rental Income | €14400 |
| Less Expenses | |
| Letting Fees | €1476 |
| Mortgage Interest | €6600 |
| PRTB | €40 |
| Mortgage Protection | €180 |
| Insurance | €400 |
| Repairs | €350 |
| Rental Profit | €5354 |
As the rental profit is over €5000 Flojo must register for Income Tax and file a Form 11 for 2022. She has until the 31st of October 2023 to do this. Her tax liability, at 52%, comes to €2784.
Preliminary Tax
Now that she’s in the self-assessment system Preliminary Tax becomes an issue. Not for 2022 as that’s her first year of self-assessment. For 2022 she must pay the liability by the 31st of October 2023. There is an extension, usually of up to 2 weeks, to pay and file but aim for the earlier date.
Let’s assume that her rental profit for 2023 was €6000 and her tax liability is €3120. Flojo will have to pay that liability by the 31st of October 2024 and also pay preliminary tax for 2024. Using the 100% rule, by paying 100% of her 2023 liability for 2024 her payment next year would be double.
That’s the downside. On the plus side when it comes to paying her 2024 tax liability, she will have already paid €3120.
Actual Cash Position 2022
If we look at the actual cash position for 2022, we can begin to understand the pressure the Johns are under.
| Gross Rental Income | €14400 |
| Less Expenses | |
| Mortgage repayments | €12000 |
| Letting fees | €1476 |
| PRTB | €40 |
| Mortgage Protection | €180 |
| Insurance | €400 |
| Repairs | €350 |
| Tax Liability | €2784 |
| Cash Loss | €2830 |
The issue for the Johns is the loss. They knew they wouldn’t make much every year but were happy to hold onto the property. It wasn’t costing them anything and the value was going up.
Now it is likely the value will drop, and it costs them €236 per month to have it. And not forgetting the associated hassle of filing tax returns and landlord obligations. It’s driving poor Flojo to the Rioja every Friday night! To make matters worse Tubridy is exiting the Late Late Show. There could be a bottle of Wooly Sheep on a Thursday night to ease the pain!
Tax Tips
Let’s look at some tax tips to see where we can help. Increasing the rents by €250 per month, with costs staying the same, would at least put them in a neutral position. It may not be possible if they are in a rent pressure zone. They could also shop around to refinance the mortgage. From a tax perspective, they can look at
Maximising Lower rate band
For 2023 the lower rate band is €80000 for a married couple/civil partnership. This is €40000 for each person. The most one spouse can earn at the lower rate is €49000 which leaves €31000 available to the other spouse. Flojo has a salary of €73000 and Bojo is on €28000. The most Flojo can earn at the lower rate is €49000.
As all the rental profit is in her name, she is paying higher rates of Income Tax and USC on the profit. Putting the property into joint names would save tax. Bojo can earn up to €31000 at the lower rate but is earning €28000. He has the scope to earn another €3000.
| 50% of the 2022 rental profit – Bojo | €2677 |
| Tax, PRSI, USC 28.5% | €763 |
| Flojo share | €2677 |
| Tax, PRSI, USC 52% | €1392 |
| Total Tax – both | €2155 |
| Tax liability Flojo only | €2784 |
| Tax saving | €629 |
Moving property from one spouse to joint ownership has no CGT or Stamp duty cost.
Gifting from Parents or others
It is often the case that parents have accumulated wealth and want to leave it to their children. The children are now adults with mortgages, kids, and increasing prices for everything. Gifting them some money now rather than waiting until you die can be a massive help.
The parent-child Group A threshold is €335000 and is a lifetime limit. Anything above the threshold is liable to tax at 33%. Bojo’s parents could give €12000 each year to Flojo and Bojo and not eat into the €335000 threshold. €1000 per month would make a massive difference to them and they could use that to pay the tax liabilities. This small gift exemption can be a useful planning tool.
Pension Payments
Flojo hasn’t a pension, but she has a tax liability for 2022 of €2784. She’s in her 40s and the pension issue has been bothering her. She could make a pension payment in 2023, before the tax return filing date, and reduce her liability. She can put up to 25% of her salary into a pension.
| €73000 x 25% | €18250 |
Not in funds to pay that amount but she would like to get rid of the tax liability. She can put in
| €6960 x 40% | €2784 |
This will reduce her 2022 liability to nil. Should she keep doing that she will be contributing to a pension fund and eliminating her tax bill. To reduce her 2023 liability to nil the pension payment would be
| €7800 x 40% | €3120 |
The added advantage of going down the pension route is the preliminary tax saving. Remember there would be a double hit in 2024. But as the final tax liability is nil, based on the 100% rule, the preliminary tax payment would be nil too.
Vacant residential premises
You can get tax relief on certain pre-letting costs for vacant residential properties. The property must be vacant for 6 months and the expenditure must be a usual deductible expense. For example, repairs costs incurred before a first letting isn’t an allowable expense. But it would be allowable if the residential property is vacant for 6 months before letting.
The vacant period used to be 12 months and the maximum deduction was €5000. From 1 January 2023, that vacant period was reduced to 6 months and the deduction doubled to €10000. We have found this relief very beneficial for clients who were
- doing up a property or
- converting one property into several units
Looking forward
I met with Flojo a few years ago and my view at that time was the property would make a great pension. That was on the basis that they could get through the pain of renting it and the tax payments. The benefit in later years would be
- Greater profit with the mortgage out of the way
- Lower or no tax cost depending on her circumstances
- Own a valuable asset that she could sell
With the hike in interest rates, she is under pressure and looking to sell. The next question was what CGT do I pay if I sell? The CGT was minimal, and it came as a surprise to her that the number was so low. That is because of Principal Private Residence Relief [PPR]. 37 The Ferns was their PPR from 2005 until 2021. If they sell in 2023, they will have owned the property for 18 years. Of the 18 years, it was their PPR for 16. Plus, the final year of ownership would also qualify as a PPR year. The property cost €225000 and the sales proceeds will be about €280000. The relief works like this
| Sales Proceeds | €280000 |
| Less Costs of Sale – legal, tax, etc | €5000 |
| Net Proceeds | €275000 |
| Less Cost of property | €225000 |
| Gain | €50000 |
| PPR relief €50000/18*17 | €47222 |
| Chargeable Gain | €2778 |
| Less personal exemption | €1270 |
| Taxable Gain | €1508 |
| Tax Payable 33% | €498 |
Moving abroad
For some people moving to Kerry would be like moving abroad! Many accidental landlords move abroad to work for a few years and don’t want to sell their home. The plan is to return home at some stage and having the family home to move back to is a positive. But what about letting it while away?
Again, you will need to make sure you file your tax returns and pay the taxes owed. There can be planning tips here too and the taxes rates are more attractive for non-residents. You will only pay 20% Income Tax, don’t pay PRSI, and USC rates will be low or nil.
Before adopting any course of action please get some advice to ensure you are doing the right thing. Everyone’s circumstances are different. You will need to talk to someone that understands yours so you can get things right and plan ahead.
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