Renting rooms – a taxing matter?

The recent announcement from the Revenue Commissioners that Airbnb hosts must account for their tax or face penalties has struck fear into the heart of many putative hoteliers. However, while people may now approach renting out their house with trepidation, it doesn't have to be so.

After all, another scheme allows you to earn up to €12,000 a year, tax free. And with the much-publicised property shortage, you may find it easy to generate some extra income. But what tax liabilities do those who have earned income from short-term rentals have to face?

Who has to pay tax on rental income?

In short, everyone, provided that their annual income is in excess of €8,250 a year, is obliged to pay tax on income generated from short-term lettings such as those advertised on Airbnb.

The Revenue only recently clarified the situation and agreed to an information-sharing agreement with the online accommodation provider, but this income has always been taxable, meaning some people may be liable to penalties.

On the other hand, income earned via the rent-a-room scheme may be tax-free up to €12,000 a year.

Above this threshold, income earned is treated in the same way as other rental income and tax is charged at your marginal rate.

What tax form should I file?

The tax form you must file depends on the level of income you’re earning from Airbnb. If, for example, you’re a PAYE worker and earn less than €3,174 a year in so-called “chargeable income”, then you won’t have to register for income tax with Revenue and can avoid the more arduous Form 11.

Instead you can file a Form 12, which can be downloaded from revenue.ie or completed online. If you complete it online, you should find certain important information from your Revenue record will have been prepopulated and you need only complete the sections of the form that are relevant to you.

If you are already registered with the Revenue’s PAYE Anytime service, you can complete the eform by clicking on the eForm 12 link on revenue.ie and using your Anytime pin number.

According to David O’Sullivan of tax-refund company TaxHug.com, those with rental or other non-PAYE chargeable income above €3,174 need to register with Revenue for income tax and file a Form 11 by October 31st, 2015 (in respect of income earned in 2014) or incur a late filing fee.

Income at the level of a Form 12 is exempt from PRSI, and the tax owed is collected by reducing the tax credits normally offset against earnings from a PAYE job, smoothing cashflow issues. You may also be liable to preliminary tax for the 2015 tax year. If you file a Form 11, you have to pay some tax towards the 2015 year – either 90 per cent of your final liability for 2015; 100 per cent of your final liability for 2014; or 105 per cent of your liability for 2013.

It often catches people when they first go self-employed. “It feels like a double tax payment,”says accountant Sinéad Doherty of Fenero, and it will mean you’ll have to find two year’s tax payments for this year’s filing deadline.

What rate of tax will I have to pay?

Tax on Airbnb income will be treated like all unearned income and you’ll pay tax on it at your marginal rate. Oh, and you may have to pay USC (at up to 7 per cent), and if you’re above the €3,174 threshold, PRSI too, at 4 per cent.

Consider the example of someone letting a room in Dublin for €80 a night. They have an occupancy rate of about 45 nights in the year, which gives total earnings of about €3,600. If they’re a higher rate payer this means that they’ll have to settle a tax bill of about €1,800 in October.

Even worse, if you are self-employed and registered for VAT, you are also obliged to account for VAT on your lettings at a rate of 9 per cent.

This means if you pay tax at a higher rate, you may see as much as half of your Airbnb income go on tax. For a PAYE worker, this threshold may act as a ceiling on the amount of Airbnb hosting you wish to do, in order to avoid paying additional tax.

However, as we will see further below, this tax can be reduced by offsetting expenses and working out your “trading profit”, as opposed to your gross income.

Doherty also warns earning additional Airbnb income may push you into a higher tax bracket, which may make it even less attractive. A single person with a salary of €33,800, for example, will have to pay tax at the higher rate on any additional Airbnb income.

Will it effect benefits I’m entitled to?

If you’re entitled to benefits such as social welfare payments, declaring your Airbnb income affect your payments. According to the Department of Social Protection, any rental income you get will be assessed as means and may affect your payment.

What expenses can I declare?

Just like landlords, Airbnb hosts can also offset a number of expenses to help reduce their final tax bill.

These include the booking fee hosts pay Airbnb, which is levied at 3 per cent of the total reservation; the cost of getting advice from an accountant; and the cost of cleaning, laundry and any meals provided.

In addition, much like landlords, Airbnb hosts are also entitled to claim a deduction on the overall costs of running a property, including home insurance, electricity and gas, phone/broadband, repairs and maintenance, mortgage interest and wear-and-tear on fixtures and fittings, allowable at a rate of 12.5 per cent over eight years.

Of course, the question is how much of these costs will the Revenue determine to be “reasonable?”

Doherty warns it might be hard to justify that your electricity bills, for example, are going up significantly due to the presence of your guests, and she urges people to be careful when totting up their expenses.

And think twice before you bin that receipt for sausages and rashers. Doherty advises holding on to such receipts in the event of a Revenue audit.

“You want to make sure you’re covered in case you’re audited. Keeping evidence of all the costs you’ve incurred and starting a habit of keeping receipts is the way to go,” Doherty says.

Will I face penalties?

Depending on whether or not you have failed to pay tax on your Airbnb income, you may face penalties on outstanding tax. These can range from 5-10 per cent to as much as 100 per cent, with Revenue typically applying a lower rate of penalty if they deem tax avoidance to have been an honest error.

If you can’t find the funds to settle your bill, Doherty recommends engaging the services of a tax adviser and engaging with the Revenue to come to an agreement about paying your bill in instalments.

“They are generally quite flexible and won’t be knocking on your door looking for a lump sum,” she says.

What if I want to avoid tax?

If you are interested in maximising your home to generate income, you can do it without having to pay any tax, at least on income of up to €12,000 a year. The only catch is that you’ll have to put up with your guests for much longer periods of time.

The rent-a-room scheme allows people to earn income, tax free, from taking in long-term paying guests, such as students over the course of an academic year. It means if you’re renting two rooms for a combined €1,000 a month in Dublin, for example, you won’t be liable for any tax on it.

And, it won’t affect mortgage interest relief or your capital gains tax exemption if and when you sell your home.

But there are some catches, most importantly if you go over the €12,000 limit, Revenue will treat all your income as rental income, and you won’t benefit from the relief at all.

You can expect to earn about €450 a month from a student looking for a “digs” in Dublin, a price which includes utility bills and a light breakfast. If you provide additional meals, you could expect to charge more.

In Cork you could expect to earn about €100 a week for a house located close to a University College Cork or Cork Institute of Technology.

There are online portals which aim to match those looking to rent a room with those who provide them.

These include homestay.com, which already has 1,000 hosts across the country. While it also operates on a short-term basis similar to Airbnb, it’s now looking for hosts to take on students. It’s free to join and list your room on the website, with guests paying 15 per cent of the total booking fee as a deposit to homestay.com.

Other options include hostingpower.ie, and you can also contact the colleges directly.

You could consider hosting a foreign student for a shorter period of time. The Revenue confirmed that such bookings will be deemed tax-free under the rent-a-room scheme.

Portals such as International Student Accommodation, isaccommodation.com, allow you to target this market.

Rent-a-room scheme: ‘We’ve met lots of people over the years’

Fancy boosting your income by as much as €12,000 a year, tax free? Mick Power and his wife, based in south Dublin, have been supplementing their income by doing just that for the past four years.

With three children, aged from 17 to 25, the couple got their house extended a few years ago, only for their older son to move out and get married. So the couple decided to rent up to two rooms in their house to foreign students.

Originally, they let a room to students during the summer, but now they are using homestay.com to attract older foreign students, or graduates who come to Dublin for an internship, typically in their 20s and 30s. Lettings are generally from one to three months, and the family have had guests from all over.

"It's been great for us. We've met lots and lots of people over the years and have even been to a wedding in Italy from it," he says.

Power charges a flat fee to his guests, which includes electricity, broadband, heating etc. As his guests are older, they are usually happy to cook for themselves in the family’s kitchen.

He was initially concerned when he heard the recent fuss about tax liabilities arising from Airbnb income. “I was very concerned about it and got in touch with the Revenue when it broke,” he says, but was later assured that the rent-a-room tax exemption applies, as the bookings are for a longer period of time than Airbnb.

Power likes the social aspect of longer term lettings. “You kind of get to know someone,” he says. “It expands your horizons. We’ve always enjoyed opening up the home.”

While he concedes letting a room to students is “not necessarily for everyone”, he would “absolutely recommend it to friends and family”.