Tax liability for a reluctant landlord couple
Q&A: My partner and I bought a small house in 2004 for €302,000. The intention was to sell it on after a few years but then the market crashed. We had a child and wanted to live closer to family so started to rent the house out in 2010 and rented a bigger house ourselves closer to family. We then took the plunge again and bought a bigger house closer to family in December 2011, as it was a very good price. Our family assisted with the deposit.
We would love to sell the first house but cannot shift it. We owe a mortgage of €231,000 and the house is only now worth approx €170,000. It is rented for €930 per month, the mortgage payment is €980 (capital and interest). Even though we are not covering the mortgage, and we do not want to hold onto the house, my friends tell me that we might have a liability owing to the Revenue on a monthly basis, is this true? We have had to pay the second home charge, and household charge for both houses and cannot afford any extra monthly liability.
Mr D.D., email
You are one of a growing number who find themselves reluctant landlords by dint of their failure to sell a property.
Many people were persuaded during the boom to “get on the housing ladder”, pretty much regardless. As a result, people bought small flats or houses in parts of the city or country where they had no intention of settling on a more permanent basis with the intention of trading up as capital values rose.
Where people are able, or are fortunate to have family who can help financially as with you, they have been able to source appropriate new accommodation. But, despite the steps taken by the Government to assist people groaning under the burden of debt in their own homes (with enhanced mortgage relief), nothing has been done to help those who have moved out of those homes. In fact they are in an even worse position.
Once you move out and let your property, it is deemed an investment. This is the case even when you have not bought a second property and are simply biding your time while renting. The catch, to which your friends appear to have alerted you, is that you are liable to tax on income earned by renting your home. There is, unfortunately, no relief under Revenue rules for people who find themselves renting only because they cannot find a buyer at any price (or at least any price the bank which holds security on your mortgage will allow).
In Revenue terms, whether you are a professional property investor and landlord or an accidental one, you have the same obligations. All rent, minus certain allowable deductions, is subject to income tax.
The fact that your rental income does not even match your monthly mortgage payment is irrelevant in this regard.
However, it is not quite as bleak as it might seem. The major exemption is on three-quarters of the interest which accrues on a mortgage used to buy the investment property – though not the capital payment.
Other deductions are allowable for maintenance, repairs, insurance and the costs incurred in renting the property – though not the residential property tax or second home charge.
You can find fuller details in the Revenue’s Guide to Rental Income ( iti.ms/S2Pfpa).
Bear in mind, you cannot claim relief against rental income for mortgage interest unless you have registered as a landlord with the Private Residential Tenancies Board. Reluctant landlord or not, you are obliged to do this by law.
If you find your tax liability presents a problem, you should approach your bank about the prospect of making this loan interest only, at least for a period. Another solution might be to sell with the bank’s approval to transfer the unpaid balance to your new mortgage.
Banks’ reluctance to allow sales at a loss is understandable but the Government is applying significant pressure to encourage lenders to provide innovative ways to help mortgage holders address unsustainable debt in an effort to improve economic sentiment.
Impact on our medical card of selling shares
My wife and I are pensioners and rely on the use of our medical cards. If we sell some shares which we possess long term, would the proceeds be considered income and be included in our permitted yearly qualifying medical card allowance?
Mr R.G., Cork
At the moment, the shares will be assessed as capital under the medical card means test, along with all other savings and investments you hold and any property you own other than your own home. The first €72,000 of capital assets is disregarded as a couple (a figure that would be halved for an individual).
Thereafter, if you are younger than 70, your income is determined by the interest you receive or by a notional interest rate as set out below. You are deemed to have €1 income per €1,000 savings up to €82,000; €2 income per €1,000 between €82,000 and €92,000 and €4 per €1,000 on anything above that.
If you are over 70, the HSE applies a “notional” interest rate over the €72,000 threshold, reviewed quarterly, unless you apply to be assessed on actual interest paid in the previous year.
My understanding is that, if you choose to sell, the money you receive will be considered as income under medical card rules and assessed within your annual medical card allowance.
This column is a reader service and is not intended to replace professional advice. Please send your questions to QA, c/o Dominic Coyle, The Irish Times, 24-28 Tara Street, Dublin 2, or to firstname.lastname@example.org. No personal correspondence will be entered into.