QUESTION: I rent out a number of properties, some of them at a loss. However, I have been told that the mortgage interest payments I make may not be all tax deductible. This would mean paying tax, even though I do not make an overall profit. Can you advise please?
ANSWER: There have been two very important tax changes in the past five years or so, relating to mortgage interest.
Up until 2006, all of the mortgage interest paid was allowed as a tax deduction. In 2006 however, it was provided that no mortgage interest relief would be allowed on a particular property unless the tenancy was registered with the Private Residential Tenancies Board (PRTB). This restriction was introduced as the take-up by landlords on registering their tenancies with the PRTB was very low.
You must therefore ensure as a matter of urgency that your tenancies are all registered with the PRTB. Furthermore, if tenants change during the year, all your tenancies in that year must be registered with the PRTB as, otherwise, no mortgage interest is allowed.
This is a very onerous provision and failing to register could give rise to quite a large tax liability. It is possible, in certain circumstances, to actually register a tenancy which has already be terminated.
Paying the late filing fee to the PRTB is a small price worth paying in order to get the mortgage interest relief allowed as a tax deduction.
In 2009, a further restriction was introduced, which provided that only 75% of the mortgage interest paid would be allowed for tax purposes. This has brought many more landlords into the tax net.
Unfortunately therefore you could end up in a situation where you are paying tax, even though, commercially, you are operating at an overall loss.
You mentioned that you have a number of properties, some of which incur losses. There is a measure of relief in situations like this:
Firstly, you can offset losses in one property against profits in another property, within the same year. You are therefore assessed on your net profit for the year.
If you make a net loss in any year, you cannot unfortunately offset this loss against your non-rental income in the year. You can only carry this loss forward and offset it against your rental profits in a future year. These losses can be carried forward indefinitely.
Be very careful if some of your properties are jointly owned with your spouse. Each spouse's rental profit/loss is calculated separately. It is not possible to offset the losses of one spouse against profits of the other spouse.