Catching up with tax liability on rental income

My daughter bought a house in Ireland in May 2014 and moved to work in London in November 2014 . Her house is now rented. Her annual rental income is €10,000. What is her tax liability on her annual rental income?

Ms S.J., Limerick

Rental income is treated in the same way as any other income as far as tax is concerned. That means it is subject to income tax, universal social charge and PRSI.

However, when it comes to rental income there is one important difference. Regardless of where you are based for tax purposes, income from rent will almost always be charged in the country where the property is located. And that is the case in Ireland.

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So, even though your daughter is living, working and paying tax in the UK, she is liable to the Irish Revenue for any income on her property here. She should also be notifying the UK Inland Revenue of that income and any tax paid on it to the Irish authorities.

Not only that. Her Irish tenants should be withholding basic income tax on their rent and forwarding it to Revenue unless she has an agent here specifically dealing with her affairs.

The other bad news is that receipt of rental income obliges her – or an agent on her behalf – to file an annual tax return here. I’m guessing she hasn’t been doing that so she could be facing some penalties for late filing and late payment of tax due.

Deductions

The good news – at least once she gets up to date with her taxes – is that she is allowed make certain deductions from her rental income before assessing income and other tax liabilities, and they are reasonably generous.

Chief among these is a substantial portion of any interest that she is paying on the loan she secured to buy the property in the first place. Up to this year, she could claim relief on three quarters of the interest paid on her mortgage. That has risen in 2017 to 80 per cent.

Of course, interest forms only part of her monthly mortgage repayments but there is no allowance for claiming against the rest of her loan, only the interest element.

So what else can she deduct?

Well, first of all, if an agent is managing the rental of her property, she can deduct any management fee from the rent received before assessing tax liability. That also applies to the cost of advertising for tenants, insurance premiums on the property and any legal fees incurred in drawing up rental agreements.

There is also a fee for registering her property with the Private Residential Tenancies Board (PRTB). That fee is €90 and I'd strongly advise her not to dodge it, not least because failure to do so will mean she cannot claim relief on her mortgage interest and that will cost her in the end. Late registrations will cost €180.

As the mortgage holder, she will be paying for a mortgage protection policy and that sum can also be deducted form gross rent before assessing any tax liability. So too can fees incurred by accountants to do up her accounts for tax purposes on the property – assuming she uses one.

If she pays the waste charges on the property, they can be claimed against rental income as well, as can the cost of repairs or maintenance.

Wear and tear

Finally, she can also claim for wear and tear of furniture. This is done over eight years at a rate of 12.5 per cent per annum of the purchase cost of the items – say a suite of furniture, beds, a cooker etc. The important thing is that she keeps receipts for everything she has bought or buys in future for the property and also receipts for any bills incurred in actually renting the property.

Bear in mind that any costs incurred before the property was rented cannot be claimed – apart from the wear and tear provision – and nor can any cost for the home owner’s own labour.

As you can see, without having some sense of the offsetting costs she has incurred, it’s impossible to give you a workable figure on what she might owe the taxman – if anything. However, it is really important that she both registers with the PRTB and also that she files tax returns for the years in which she has received rental income. The deadline for such returns in the end of October in the following year, so her return for 2016 needs to be with revenue by the end of October 2017.

If, especially in the early years, she is actually making a loss on her rental income after allowable expenses – and with income of just €10,000 a year she may be, she can carry that loss forward to offset against rental income in succeeding years. But she still needs to file a return for each year, even if only to notify Revenue that there is a loss involved.