Are repairs made prior to a first letting tax deductible?
Property Clinic: Also, how close to the start of being rented does that work have to be done?
If a house, currently owner occupied, needs some work before it can be rented out for the first time – a new front door and windows, general painting and decorating – is that tax deductible? And, how close to the start of it being rented does that work have to be done, ie if the work was done, but it wasn’t put on the rental market until a few months later, is the work still tax deductible?
The general rule is that expenses incurred prior to the first letting of a property (by its current owner) are not allowable, as such expenses are not expenses relating to a particular lease. While legal costs incurred in the creation of the first lease and marketing costs are allowed following case law there is no such provision for repairs incurred in advance of the first letting.
However, the Finance Act 2017 introduced relief to allow pre-letting repairs of up to €5,000 per premises where the premises have been vacant for at least 12 months and which is subsequently let as a residential premises between December 25th, 2017 (the date of the passing of the Act) and December 31st, 2021. For this expenditure to be allowed, it must be incurred in the 12 months before the premises is let as a residential premise and must qualify as a repair cost. The expenditure is then deemed to be incurred on or after the first day the premises was let. There is a clawback if the person who incurs the expenditure ceases to let the property as a residential premises within four years of the first letting.
Not all expenditure on a property necessarily qualifies as a repair to the premises. Costs can come under two other categories: enhancement expenditure, which relates to substantial improvements and which is only deductible when the property is sold as it is added to the base cost of the property for Capital Gains Tax purposes; or expenditure which qualifies as plant and equipment and which can be written off over eight years (12.5 per cent per annum) against the rental income.
This would capture the furniture and equipment costs incurrent in the fit-out of the premises. In the scenario outlined, it is likely that the new door and windows will fall into the enhancement category and be added to the base cost of the property. The general painting and decorating will be classified as a repair and will either be disallowed as pre-letting or may be allowed if the premises has been vacant for the 12-month period.
Suzanne O’Neill is a tax partner at RSM Ireland