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‘Accidental landlord’ worries about ‘penal’ tax rate

Q&A: Dominic Coyle

You can claim tax relief for ongoing repairs and maintenance on your rented property. Photograph: Getty

Just looking for some advice as I have just become “an accidental landlord”. Someone was telling me you have to pay tax at 40 per cent of your rental income.

I’m just wondering why anyone would choose to become a landlord, as this seems a penal charge. I’d appreciate any advice you would have for a first-time landlord etc.

Ms BD, email

The tax you have to pay on rental income depends on your overall income. Rental income is treated the same way as any other income. If your non-rental income is already sufficiently high that you are paying income tax at 40 per cent, then any additional income you receive from renting a property will also be taxed at 40 per cent.

However, if you had no other income, you would be taxed – initially at least – at 20 per cent.

The charge is not penal: it is simply the rate of tax applicable to your income.

Why do people become landlords? Well, presumably because they think there is a chance of making a return on the properties – in both capital and rental terms. However, it can certainly be daunting for people who are not used to dealing with a business and with tax returns – such as accidental landlords, of which there are still many even a decade after the property crash.

In addition, if you are a landlord, there are certain costs that you can deduct from your rental income before assessing the tax due.

Letting costs

These include 80 per cent of the interest being paid on any mortgage on that particular property. This figure relates only to interest accruing since January 1st, 2017. For previous years, the figure was 75 per cent.

You can also deduct any costs directly associated with letting the property. That would encompass advertising costs, any estate agents’ fees in letting the home and legal fees incurred in drawing up a contract. You can also claim for accountancy fees and the premium for insuring the property against this income. You will need to insure the building.

In addition, you can claim for the cost of ongoing repairs and maintenance on the property, such as cleaning and painting, assuming you actually incur such costs – but you cannot charge for your own time if you carry out the work.

Finally, you can claim for wear and tear of fixtures and fittings in the property- also known as capital allowances. In practice, this means you can claim 12.5 per cent of the cost of furniture and white goods bought for the property each year over eight years after which their value is written down to zero.So what can you not claim? Well, first, you won’t be able to claim any expense incurred before the property was first rented – apart from costs specifically connected with securing that tenant as outlined above. You also cannot claim for the local property tax charge on the property. It was thought the Government might change the rules on this in the last budget but that did not happen. Possibly next year.

It’s really important that you keep a file with all the expenses you incur in relation to the property. If you have an agent managing the property, their costs can be deducted but do make sure they are keeping a close record of expenses arising. If you are managing the rental yourself, it is easy to lose details so do keep everything together in an organised fashion from day one.

And remember, you will need to file an annual tax return.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or by email to dcoyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice

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