Buy a property. . . with a (tax-friendly) income

By buying a place with rental potential your mortgage could be paid off in no time

 

If you’re in a position to buy a home, or maybe you’re downsizing,why not consider properties with the potential to deliver additional income ? It might even be tax-free.

You can now earn €14,000 a year from renting out part of your property, thanks to increases in the rent-a-room tax credit scheme in recent years.

The benefits of opting for this route over a traditional buy-to-let investment can be significant. First, you can earn up to €14,000 tax-free every year – and that means no income tax, no PRSI and no universal social charge thank you very much. Second, it’s not just restricted to your spare bedroom – you can also claim the tax relief for a standalone unit with a separate entrance, once it’s attached to your main property.

Property 1: Gouldavoher, Limerick: Based on a monthly mortgage of €843, someone could own this property for just €343 a month after tax-free rental of the side flat.
Property 1: Gouldavoher, Limerick: Based on a monthly mortgage of €843, someone could own this property for just €343 a month after tax-free rental of the side flat.

Consider property 1 (pictured above) in the Limerick suburbs, on the market for €220,000. It comes with a one-bed granny flat and a separate entrance. With an expected rent of about €500 a month, the owner of this property could stand to earn about €6,000 tax-free a year. Based on a monthly mortgage of €843, someone could own this property for just €343 a month – or use the income earned to save for renovations or retirement. If the owner decided to use the income to “overpay” their mortgage, they could save themselves €50,000 in interest payments, and would pay off a 30-year mortgage after year 16 – that’s 14 years early.

Property 2: Brookwood Crescent, Artane: If the garage here was converted to a one-bed property, the owner could stand to earn up to €1,000 a month tax-free.
Property 2: Brookwood Crescent, Artane: If the garage here was converted to a one-bed property, the owner could stand to earn up to €1,000 a month tax-free.

Another option is to buy a property with potential for a “granny flat”. Property 2 (pictured above) is a three-bed house in Brookwood Crescent, Artane, in north Dublin, on the market for €500,000. It has a sizeable double garage attached, which could be converted, and with a separate entrance, could be a nice income-earner. If converted to a one-bed property, the owner could stand to earn about between €800 and €1,000 a month, based on rents in the area. The refit would probably cost €30,000 to €50,000 to complete, but once up and running could generate a tax-free income of up to €12,000 a year. So, once the costs of renovation are paid off, the homeowner could see their monthly mortgage repayments shrink to just about €900 a month.

Rules and restrictions

But remember, there are restrictions; Revenue isn’t inclined to offer you the potential for such a tax-free gain without imposing some charges. First, don’t think about putting the property up on Airbnb and getting tourists in if you want to keep all your earnings. Under Revenue rules, you can’t claim the relief against income earned from short-term guests, who “book accommodation through online booking sites” such as Airbnb. This may also exclude short-term students, although Revenue will accept students who stay for a term or academic year.

Second, if your annual income is going to be more than €14,000, then the scheme won’t apply to you. Yes, it might seem unfair, but once you earn €1 more than €14,000, then the total amount of income is taxed. While certain expenses will be allowable off this income, such as marketing costs, maintenance etc, you will be looking at paying tax at your marginal rate on the “profit” – or rent minus expenses – so tread carefully if you don’t want this scenario.

Third, while it might be a nice idea to get your children into the unit and charge them rent, this also isn’t allowed under Revenue rules, which exclude “your child or civil partner, an employer or an employee” from renting the unit.

Scheme applicability

And remember rent-a-room won’t apply to every situation. Revenue says that a self-contained unit within a residence, “such as a basement flat or a converted garage attached to the residence” will qualify for tax-free rental income. However where units are adjacent – but not actually attached – they “cannot qualify for the relief”.

Property 3: Mount Salus, Dalkey: A separate self-contained mews could command a monthly rent of €1,500. However, as it’s “separate”, it likely won’t qualify for rent-a-room relief.
Property 3: Mount Salus, Dalkey: A separate self-contained mews could command a monthly rent of €1,500. However, as it’s “separate”, it likely won’t qualify for rent-a-room relief.

Take property 3 (pictured above), Mount Salus in Dalkey, Co Dublin. The substantial five-bed property, on the market for €2.85 million, comes with a separate self-contained mews. With one bedroom, a study, open-plan living area – and sea views – it would likely command a monthly rent of more than €1,500. However, as it’s “separate”, it likely won’t qualify for rent-a-room relief, while annual income of more than €18,000 would also push it into being a mainstream let.

And there are other downsides. Having strangers live in such close proximity may not be your cup of tea, and you also need to bear in mind how new regulations might impact.

If you avail of the rent-a-room scheme, you may also have to register your property with the Residential Tenancies Board. It takes a slightly different view on tenancies to that of Revenue; it argues that if you rent out a self-contained unit in your home – even if you also live in that home – then the rights and obligations under the residential tenancies Act apply. This means that such landlords are required to register with the RTB.

As an adjudicator in a recent RTB hearing recently wrote, the Revenue scheme “has no bearing or relevance to the tenancy legislation”. For a homeowner then looking to rent out a unit, remember that this means that you will have to abide by RTB rules if you want a tenant to leave, and you might also be subject to complaints, through the RTB process, from your tenant.

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