Can we set cost of renting home against rental income?
Q&A: Family outgrowing boom-era apartment that is still in negative equity
We bought an apartment at the height of the boom. Despite the house price increases, it is still only worth about 75 per cent of what we paid for it. Since it makes no sense to sell it, we would like to rent it out to tenants and then rent a small house ourselves (having teenagers rather than small children now).
If we rent out the apartment for an amount that is less than the rent we are paying on a “new” place, do we have to pay tax on that rental income? Would it make a difference if the rental income was lower than the mortgage?
I had hoped the rental income would largely finance the “new” place, and that we could top it up. If we have to pay tax on the former, the “top-up” would have to be much greater (and essentially render the whole idea unworkable).
Ms B.C., Dublin
You are not alone. There’s an awful lot of talk about property price rises even during the Covid pandemic – and indeed prices have been rising over recent years – but it remains the case that people in certain areas who bought close to the peak ahead of the 2008 financial crash are still nursing losses on their property.
And that is a significant problem for families like yours that are growing. The apartment made sense when you were had a smaller or younger family but, as you say, teenagers take up more space as do their belongings.
It makes perfect sense that you would look to move to a larger home but, as I think you fear, the situation here is that the Revenue Commissioners look at each side of your equation in isolation, not as one package.
The rules on rental income are pretty clear. You pay tax on it. It is taxed at part of your overall income and, therefore, will be taxed at the higher or marginal rate that applies in the case of you and your husband/partner.
And as it is income outside any PAYE jobs you have, you will have to file an annual tax return.
The Revenue is unconcerned whether the rent you receive for the apartment is less than you are paying for your “new” home, nor is it relevant that the rent you will receive is less than your regular mortgage payments are costing.
That may make the whole idea untenable but your other options are limited. Either you stay where you are, which seems a bit of a squeeze and can lead to tensions in its own right, or you sell the apartment, accepting the loss, and move on to try to buy or rent a new home.
However, before you throw in the towel, you should consider whether expenses that can be set against the rental income might help make the figures add up.
These are costs that you will incur anyway and which would have to be taken into account in any budget reckoning on the feasibility of such a move.
Importantly, you can claim 100 per cent of the interest on the mortgage for the period the apartment is let (and between lets as long as you do not live there). You can also deduct the cost of premiums paid on your mortgage protection policy during the rental period.
You will still have to insure the buildings (and any contents you leave there) while the apartment is rented out and the cost of premiums against fire or public liability are deductible.
In addition, you can claim costs incurred in renting out the property in the first place (management fees and costs levied by letting agents, including advertising, lawyers and accountants); the cost of registering with the Residential Tenancies Board, which you are obliged to do; any charges the tenant doesn’t pay – for instance if waste charges are not included in the rental contract.
Maintenance costs for any cleaning, painting or decorating required can also be set against rental income as are the cost of repairs to the property. Finally, you can claim the cost of furniture and fittings in your property over an eight-year period. You claim 12.5 per cent of such costs each year.
As you can see, keeping records would be important to make sure you don’t miss out on what you can claim and also so that they are available should Revenue require sight of them.
At the end of the day, however, there will still be tax on the net rental income.
Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or email firstname.lastname@example.org. This column is a reader service and is not intended to replace professional advice. No personal correspondence will be entered into