Looking to earn €14,000 tax-free? Get that spare room ready
The rent-a-room scheme is one of the few ways of earning income without paying tax
It’s almost the only way left of earning a crust that you don’t have to pay tax on, and it could see you increase your income by up to €14,000 a year. Now colleges across the country are calling on local homeowners to avail of the scheme and let out a room to a student to ease the housing shortage.
The attractions are clear; if you pay tax at the higher rate, you’d have to earn €26,000 or so to bring home a similar return.
So how does it work and should you consider it?
Who’s looking for a room?
As the housing shortage continues to rage in larger urban areas across the country, there is now a great opportunity to let a room in your home.
University College Dublin, for example, recently sent out an email to its alumni seeking help to provide accommodation to its incoming students for the forthcoming academic year, given the “severe shortage of rental accommodation in Dublin”, noting that “the problem is worsening”.
The college operates a portal whereby property owners can advertise their spare room free of charge, for short or long-term leases.
Similarly, University of Limerick has sent out letters to residents in the nearby Castletroy area of the city looking for homes for foreign students.
And it’s not just students that are looking for a home; professionals and interns are also looking for short-term housing arrangements.
Homestay. com, a website that allows you to to advertise a room, says it has seen a surge in sign-ups from Dublin householders over the summer to take in guests and students for long-term accommodation – and it’s still looking for more. The site already has 700 Dublin hosts but is looking for more to cater to the growing long-term student market.
You could also consider hosting a foreign student for a shorter period of time, through a platform such as isaccommodation.com.
While not under the scope of the rent-a-room scheme, if you have a child setting off for college, or to start work in a new town or country, and you could let out their now-empty room, another platform which may be of interest is Switching Rooms, which has just been launched by Aisling Byrne.
Describing it as an “Airbnb for students”, the platform allows students to advertise the room they are leaving behind on its database, search for a suitable match in the required destination and do a direct swap, “thus eliminating the need to pay any rent in their new room”.
It means that if you have an 18-year-old who will be heading off to attend college away from home this year, you can fill their potentially vacant room with a student, while they take another student’s room close to their chosen university.
How does rent-a-room relief work?
Most income you earn in Ireland – be it from your job, self-employed work, nixers, or letting out a room via Airbnb – is subject to income tax. And with the marginal rate as high as 52 per cent, it can disincentivise taxpayers from taking on additional work.
Renting out a room, however, now allows you to earn income of up to €14,000 a year tax-free, up by 40 per cent since 2010. And that means free of income tax, PAYE and USC.
No surprise, then, that the numbers availing of the scheme have rocketed in recent years. According to the Revenue Commissioners, just 2,300 people availed of the tax break back in 2004. But as the Government has increased the amount of tax-free income that can be earned under the scheme – while at the same time increasing income tax rates – the numbers doing it have almost tripled to 6,460.
This means that the cost to the exchequer of granting the relief has also increased, up from €2.7 million in 2004 to €6.9 million in 2015, although it still remains modest. Figures for 2016 are not yet available.
The scheme is applicable to students renting a room for an academic year, foreign students staying on a shorter-term basis, eg three weeks or so, or individuals renting a room in a property you own and reside in.
Key to the Revenue in its distinction between this type of accommodation and a more commercial Airbnb-style arrangement, is that the room is used “either on its own or in conjunction with other parts of the residence, as a home”.
And if you have a self-contained unit, such as a basement flat or a converted garage, you can rent these out and still avail of the scheme.
But beware: “If this unit is not attached to the property it cannot qualify for the relief”.
It means if you’re renting two rooms for a combined €1,166 a month, for example, you won’t be liable for any tax on it. Nor will it affect mortgage interest relief or your capital gains tax exemption if and when you sell your home.
However, an important point to note is that if you go over the €14,000 limit, Revenue will treat all your income as rental income, and you won’t benefit from the relief at all.
Also of note is how the Department of Social Protection treats such income under the scheme. While it disallows the income for assessment for a non-contributory state or widow/widower’s pension, or if you would be living alone without the scheme, it will be included in an assessment for other means-tested social welfare payments.
The rent relief is available per household rather than per taxpayer, so where two parties are eligible for the relief – eg a husband and wife – the limit remains €14,000.
According to Revenue, “short-term stays provided through bed-and-breakfasts, a guesthouse or online booking sites do not qualify for relief.”
Unlike your obligations when it comes to renting out a property, with rent-a-room relief, you don’t have to register as a landlord with the Residential Tenancies Board.
Do you have to tell the Revenue?
In short, yes. A spokeswoman for Revenue said the “tax exemption for income received under the rent-a-room scheme does not remove the obligation to make a return”.
And this doesn’t just apply to self-assessed taxpayers who will be used to making such a return, and who must record their income for rent-a-room relief in the “exempt income” section of their tax return.
If your only other source of income – apart from rent-a-room – is via PAYE, you must also file a Form 12 income tax return, via the Revenue’s “MyAccount” service.
“PAYE taxpayers must use MyAccount to enter the amount of exempt income on their Form 12. The taxpayer will then receive the relief due,” according to the Revenue.
How much might you earn?
How much you will earn will obviously depend on a number of factors, such as the length of time you intend letting out a room for, the location of your home, and how many rooms you can rent out.
In areas close to the University of Limerick, for example, if you rent a room on a five-day B&B basis you could stand to earn about €340 a week, but you could bump it up to as much as €600 by extending it to seven days and also providing an evening meal.
In areas around the Dublin-based universities, you can probably earn €600 a month for a five-day B&B plus evening meal offer.
All of these will be under the €14,000 tax-free limit.
If you’re not intending to let to students, you may earn more – and won’t have to provide meals – although the five-day student term may suit you better. In Dublin, for example, a room will typically rent for between about €400-€900 a month, depending on its location and whether it’s a single/double, while in Limerick, a room in a shared property will earn between €300-€400 a month.
Paying off the mortgage one guest at a time
Like many families around the country, back in the years of the austerity budgets, Mairead Corr, who lives in a four-bedroom house in south Dublin with her husband and four children, was trying to improve her family’s financial circumstances.
“I was trying to save money. I’d save €5,000 and then something else would come along. I was trying to find a way that I wouldn’t have to work too much,” she recalls.
So she decided to try the rent-a-room scheme.
“The tax thing was the greatest motivation for me. The money came in and half wasn’t going to turn around and go back out again,” she says.
Initially, Corr let out two boxrooms to students, typically of the same gender, with the goal of raising enough to fund a particular goal.
“The money would go into separate account to pay for an attic conversion,” she says.
By the end of 2015, the family had saved €30,000, enough to fund their attic conversion, which was completed in 2016.
They now had a five-bedroom house with an ensuite attic – a perfect space to continue the scheme.
“What I do is put the room up on homestay.com, collegecribs, or daft and rent.ie. We’ve had people working in Amazon, several PhD students . . . what works quite well with us is that it’s not a year-term, it could be a contract for two months.”
Corr takes a professional approach to finding and hosting tenants.
“I treat the attic like a job,” she says, adding that she’ll do a Facetime conversation with a prospective tenant, both to show them the whole house, and to get a sense of the person.
During this conversation, if the person is living at home, she’ll often ask to say “hi” to the prospective tenant’s mother or father, too.
“You get a sense of everything then,” she says.
Keeping an eye on the tenant is also advised, and Corr offers a weekly clean of the room and the bathroom as part of her arrangement, which allows her to make sure that the tenant is treating the room well.
She used to offer evening meals, but with feeding her own family, too, it was a bit “crazy” so now tenants get a place in the fridge and cook their meals themselves.
“It works nicely because Europeans eat later,” she says.
Overall it’s been a positive experience. “I’ve learned so much. For the first while I tried to mammy the guests, but I’ve learned to pull back. They want to be mammyless,” she says.
Tenants, too, tend to pick up on the expectations of the family with whom they’ll live.
“It’s a house share. They’re part of a family and part of a home,” notes Corr. But while the experience has been mostly positive thus far, it hasn’t all been plain sailing.
“We’ve had a couple of negative experiences,” she says, adding that she has encouraged a couple of tenants to “move on”.
But, as she notes, it’s teaching her children “that the majority of people are nice, and occasionally they aren’t, and they’re learning that’s okay.”
Now Corr has a new goal: paying off the family’s mortgage by the time her eldest son is in sixth year, in another six years or so.
“At that stage, with four teenagers in the house, we might need all the bedrooms.”