It's that time of year again. As some of us count the days to the Halloween weekend, others are crunching the numbers for the dreaded October 31 deadline for income tax returns.
Property income is a feature of many people's Tax Returns and with incomes falling and expenses rising, it is important to try and maximise the amount of deductions available and minimise the amount of tax payable.
This article deals specifically with your income Tax Returns but you may also need to consider any capital gains which need to be declared for 2011.
While the deadline for 2011 Tax Returns is October 31, if you file online, the deadline is November 15.
Revenue now require certain people to file online, for example, self-employed who claim allowances for property-based incentives.
Furthermore you will need to make a payment of income tax, which will include your balance of tax due for 2011 and a preliminary tax (PT) payment for 2012.
In times of fluctuating income levels, it is always worth running the numbers to determine which method of calculating your PT works best for you. There are three options:-
1. 90pc of your final liability for the 2012 tax year, or;
2. 100pc of your final liability for the 2011 tax year, or;
3. 105pc of your final liability for the 2010 tax year. (This option is only available where PT is paid by direct debit and does not apply where the tax payable for 2010 was nil).
Option 3 can be attractive in circumstances where income is rising but if it is your first time availing of this option, you will need to submit your application for the direct debit scheme by September 30.
Expenses and deductions
There is a wide range of expenses and deductions which can be claimed to reduce the level of tax on rental profits.
For example, loan interest paid on loans to purchase, repair or improve a property, insurance premiums, management fees, spending on repairs, maintenance, accountancy fees, legal fees, etc.
It is important to note that for residential property you may only claim 75pc of interest paid on loans and in addition, you must have complied with the registration requirements of the Private Residential Tenancies Board.
If you make a loss from the letting of any property in the State you may set this off against any rental profits from other properties within the State.
For example if you acquired a section 23 property in 2007 and had carried forward losses of €80k, these may be carried forward indefinitely and set off against rental income year on year until the loss has been fully utilised.
Note that rental income from properties owned outside the State is treated slightly differently and any losses arising on these properties may be set off against non-Irish rental profits only.
Also note that rental losses, whether Irish or foreign, may not be set off against any other income.
A proportion of capital expenditure may be allowable annually as a deduction against rental profits, for example, costs for refurbishing a property or for fixtures and fittings.
In general an allowance of 12.5pc is given annually over a period of eight years.
There are a number of accelerated capital allowance schemes which, in the past, have given allowances for the construction of certain types of buildings, eg, hotels, hospitals, crèches, etc, over a shorter period of time, typically seven years.
Most of these schemes have been phased out but some people may still claim for expenditure incurred years ago or may have brought forward unused allowances which they will be setting off against other rental profits.
Note that current year capital allowances are required to be set off against profits of the current year in priority to brought-forward losses.
These allowances may no longer be carried forward after December 31, 2014, for any schemes where the tax life ends on or before that date or at the end of the tax life for schemes ending after that date.
It is therefore important to ensure the most effective use of these allowances before they are lost.
Note that no change has been made to the s23 type reliefs and these losses will continue to be available to carry forward.
High Earner Restriction
A complicating factor in relation to use of losses and capital allowances is the high earner's restriction which was introduced in 2007.
It limits the amount of losses/capital allowances and other types of reliefs which may be claimed in a particular year for certain high earners, to ensure that a minimum level of tax is paid.
Before the introduction of the restriction, many of these high earners were able to fully shelter large sums of rental profits, thereby reducing their tax liabilities on rental income to nil.
In 2007, the minimum tax payable was 20pc (plus PRSI/levies) but it was later increased to approx 33pc (plus PRSI/levies/Universal Social Charge (USC).
The effect of the restriction is broadly that if you have reliefs of over €80k and income in excess of €125k in a particular year, your total combined reliefs will be restricted to either €80k or 20pc of your income.
Not only does it limit property-based reliefs but also relief for interest paid on amounts borrowed to acquire an interest in a partnership / company, artists' income, film relief, and even charitable donations.
Calculating the restriction can be complex where you are claiming a number of reliefs and have brought forward losses, capital allowances and unused reliefs from prior years.
The order of set off needs to be carefully determined and it is important that details of the unused capital allowances / losses are retained in order to determine the future availability of these reliefs.
Another complicating factor is the calculation of the USC and PRSI liabilities as these do not always follow the tax treatment.
For example, if Mr A has rental income of €50k for 2011 and has rental losses brought forward of €100k, he may be able to shelter his profits from income tax but he is likely to be liable to USC on the €50k profits, and PRSI may also payable depending on whether or not the loss forward includes capital allowances and if so, what type of capital allowances they are.
If you have a number of different properties and have brought forward losses/capital allowances, you should be aware that the position may be quite complex and therefore it is important that you review your calculations well in advance of the deadline and plan your cash flows accordingly.
It is also important that you calculate your PT payment correctly in order to avoid any interest charges. As tempting as it may be to leave the filing to the last minute, forward planning will enable you to seek advice, ensure that you maximise reliefs and allowances and minimise the tax payable in November.
Marie Flynn is tax director, PwC