Income tax return for 2013: what landlords need to know

While some landlords may just be coming to terms with settling a sizeable tax bill as a result of having never paid the Non Principal Private Residence or second-home charge, given that the Revenue's tax amnesty ended on August 31st, others are turning their thoughts to an income tax return for 2013.

The good news for landlords who pay most of their tax in the PAYE system is that their tax bill won’t rise this year due to the imposition of PRSI.

The bad news for those who are self- employed is that this imbalance is set to continue for another year, and it comes in the context of additional charges such as the property tax, which was introduced last year.

This year’s deadline is October 31st for paper filings and November 13th for those who use the Revenue’s online ROS system, but one tax adviser’s advice is to get in well ahead of the deadlines – at least with your filing if not your payment.

Sinéad Doherty, managing partner of Fenero, recommends you always prepare your tax return early in the year, “even if you do not file it or make payment of the taxes until much later in the year”.

Too late for this year, but good advice come January if you expect to be hit with PRSI for the first time next year.

Will I have to pay PRSI this year?

This depends on whether or not you’re self-employed. Since 1988, self-employed people have been paying PRSI on their total incomes, be that rental or otherwise. So if you’re filing a return for 2013 this October, you will have to pay PRSI (at 4 per cent) at this point.

The current situation is leading to an imbalance whereby those who have chosen – or who were forced by virtue of economic circumstances – to work for themselves, have a higher tax bill than those in the PAYE sector.

"As a stark illustration of this, you could have a husband and wife who jointly own a rental property. The wife is self-employed and the husband is a PAYE employee. The wife would pay an additional 4 per cent (ie PRSI) on her share of the rental income compared to her husband, simply by virtue of her being self-employed," says Doherty.

However, this is set to change. If you’re a PAYE employee you will save this time around. But as PRSI is liable on rental income for everyone from January 1st, 2014, you must account for this when filing a return in 2015.

In addition, as you will pay preliminary tax for this year’s tax bill in October, according to the Revenue, “preliminary tax for the year 2014 should include all amounts due, including PRSI”. This means a 4 per cent increase in the amount you typically pay.

What will happen next year?

As of January 1st, 2014, PAYE workers who have rental income have also to pay PRSI on this “unearned” income. As tax returns are filed on a “previous year” basis, it means that, come October 2015, landlords who haven’t had to pay PRSI up until now will have to account for this extra charge in their returns.

However, as Doherty notes, not everyone may have to pay this additional tax – it will depend on how much so-called “unearned income” you generate.

“If you are a PAYE worker and your net rental income is less than €3,174 you do not have to pay PRSI on your rental income,” she says. So, if your property earns you less than €265.50 a month in net rental income, or €3,174 over the course of a year, you won’t have to pay an additional 4 per cent.

This means that those who let out a holiday home for a couple of weeks during the year will likely stay out of this additional tax net.

To see whether or not you will be hit by PRSI, a PAYE worker should calculate their rental profits for the year.

A rental income of €15,000 a year, for example, might give a landlord a “profit” of €8,500, after deductions and capital allowances (see panel). This would put them in the PRSI net. On the other hand, rental income of about €7,000 might result in “profit” of €3,150, so below the PRSI threshold.

Remember, if the Revenue deems you to be a “chargeable” person – ie with rental income of more then €3,174 – then you will be obliged to register as a chargeable person, file a Form 11 income tax return and pay PRSI.

According to Doherty, if you just slip into the chargeable person category by even a euro you will pay an extra €127 in PRSI (ie €3,175 x 4 per cent).

If your profits don’t exceed this, however, you can instead file a Form 12 tax return, which allows for any tax liabilities to be settled via an adjustment to their tax credits, and you won’t have to pay PRSI. You can find out how to address this form at http://iti.ms/1nxblkH.

What about USC?

Everyone already pays the universal social charge (USC) on all their income, rental or otherwise, so no changes here. Assuming you already have other income of at least €16,016 from other sources, you are already incurring 7 per cent USC on rental income.

The catch with USC, however, is that it is charged on the amount of rental income received before you can deduct your capital allowances, which means a higher charge than if it was applied after this deduction.

“This is another way that certain tax reliefs have been gradually eroded over recent years,” says Doherty.

PRSI, on the other hand, is deducted after expenses and capital allowances.

Am I making a profit?

If you’re new to the renting game you may be confused as to what exactly constitutes a “profit” when it comes to tax returns. Just because your rent does not exceed your mortgage for example, doesn’t mean that you’re not making a profit on the property. The calculations are more complex than that.

“Many individuals incorrectly believe that if the rents they receive are not enough to cover their mortgage repayment, then they have no profit and consequently no tax bill. Many people in this scenario will still face a tax bill even if the rents do not cover the mortgage repayment,” says Doherty.

In essence, gross rental income less allowable expenses and capital allowances equals taxable rental income.

This means your profit is calculated by deducting all your expenses from your income. So if your property generates income of €15,000 a year and your expenses come to €7,000 then your profit is €8,000 and you must pay tax on this at your marginal rate.

"You could end up with a set of circumstances where you have substantial cash flows out but you are only entitled to claim 75 per cent of the interest you can pay," says tax adviser Brendan Allen. "So you won't necessarily be making a profit but you are still caught with a tax liability."

Remember, unlike capital losses, rental losses can be set only against rental income, not PAYE or other income. However, they can be carried forward for future rental income.

What are allowable expenses?

The easiest way to reduce your taxable rental income is to deduct as many eligible expenses as you can from the total. The Revenue covers all allowable expenses in its form IT 70 (http://iti.ms/1nxbyo5) so if you’re uncertain about anything you can check with its guidelines.

If there is a mortgage on any property for which you have earned rental income you will be able to deduct the interest you have paid on this loan, which will likely be your biggest expense. However, since 2009 only 75 per cent of total interest paid has been allowable as a deduction. You are entitled to this deduction only if you have registered with the Private Residential Tenancies Board (PRTB).

Indeed, in the event of a Revenue audit, you will be required to present your PRTB notice of registration. It’s important that these calculations are right. Allen recalls someone who came to him and who had been claiming a 100 per cent interest deduction and was left with “a very substantial tax bill”. “It can be devastating for people,” he says.

Other allowable expenses include home insurance; the cost of any goods or services you provide – central heating, television etc; mortgage protection premiums – though not critical illness or payment protection policies; and costs associated with managing the property such as letting fees.

Accountancy fees for filing your return – which are likely to be between €300-€500 – are also a deductible expense.

When it comes to the upkeep of the property, while maintenance – such as internal and external painting – is allowable, putting down a new floor may not be. If you carry out any of the work yourself, you won’t be allowed claim a deduction for your labour.

Capital allowances or depreciation

Landlords are also allowed relief on capital expenditure incurred on a property, such as outlays on furniture, kitchen appliances, etc. The so-called wear and tear allowance allows landlords to deduct 12.5 per cent of the expenditure each year over eight years. “A new floor would not be a Revenue item. But you can claim 12.5 per cent on that over a period of eight years,” says Allen.

These allowances are sometimes overlooked by people – particularly the so-called “accidental landlords”, who, unable to trade up due to being stuck in negative equity, let out their former home and rented another larger, or better situated, property for their family.

Doherty says this typically arises when people moved out and left their own furnishings behind for the tenants. But a market value can be applied to these, and 12.5 per cent of this claimed each year over an eight-year period.

Other issues

Allen has noticed a problem for some people when it comes to the Revenue clawing back stamp duty retrospectively.

For example, up until December 5th, 2007, if you purchased a home as your main dwelling (or principal private residence, in official Revenue jargon), but then rented it out without having lived in it for five years, the Revenue clawed back the difference between the rate of stamp duty you paid and the rate you should have paid if you hadn’t been granted any reliefs, such as buying as a first-time buyer.

This time frame was subsequently reduced to two years in Finance Act 2008 for purchases made after December 5th, 2007. (Note: the clawback doesn’t apply to the rent-a-room scheme).

The clawback in duty should have been paid on the date rent was first received for the property. However, some people, maybe because they weren't aware of it, or perhaps because they simply didn't have the funds, avoided this clawback, and are now being pursued by the Revenue for payment of it. Given the rates of stamp duty that applied in the run-up to the boom – in 2005 for example, a rate of 7 per cent was levied on purchases of between €381,001 and €635,000 – it can mean a sizeable tax bill for some people. Property Tax: Is it deductible? It's a source of frustration to many landlords, but while the Government has, in principle, accepted the recommendation in the Thornhill Report that local property tax (LPT) should be a deductible expense, it is going to "phase" it in over a number of years.

As the Government has not yet brought this deduction into effect, it means landlords will not be able to use the tax paid in 2013 (which was half the full rate) as an allowable expense.

According to the Revenue, “until the necessary amendment is made to section 97 of the Taxes Consolidation Act 1997, LPT is not a deductible expense and therefore should not be claimed as a deduction when submitting your uncome tax/ corporation tax return for 2013”.

“This is one to watch for the future and to make sure you claim it as soon as it becomes allowable,” advises Sinéad Doherty.

Remember also that your LPT return is tied to your income tax return.

So if you’re late paying your property tax but not your income tax, Revenue can deem your income tax return to have been filed late.

This could mean a late- filing surcharge of up to 10 per cent of your income tax liability.