Paying tax on rent even though it's at a loss?
My wife and I bought an investment apartment as part of our retirement planning, but we find the rental income does not cover all our payouts, despite paying interest-only on the mortgage. We also pay the second home charge, the household charge and management fees to the apartment complex. We are doing our tax return and see that we have to pay tax on 25pc of the rent even though it's making a loss -- why is this?
Amateur landlords are often surprised to find they can't claim a "rental loss" for tax purposes for an underperforming property. It's because the entire mortgage payment is not deductible against tax- only a portion of the mortgage interest.
Christine Keily, tax expert with www.taxback.com, says: "Even though you are on an interest only mortgage, you are a victim of the change in the rules in respect of the deductibility of mortgage interest payments which was effective from April 7, 2009, and limits the amount of mortgage interest which a landlord may utilise against their rental income to 75pc of the mortgage interest incurred. This means that even if you are on an interest only mortgage you will be unable to use 25pc of your mortgage payments to reduce your tax."
She adds: "However, there may be other deductions you are allowed to make to reduce your ultimate tax bill, which include cost of repairs, insurance, management charges and fees, wear and tear etc.
An annual 12.5pc deduction of capital allowances is particularly beneficial in respect of the fixtures and fittings. You may also be able to carry forward some losses against future profits from rental income".
In 2009 I built a granny flat for my mum, which is attached directly to my house. I paid two household charges as we have separate ESB bills. However, when I was granted permission for the flat it was on condition that it would ultimately be absorbed back into my existing house. My question is, should I have paid two household charges and when property tax comes in, will I be billed twice?
Well I can't speak for the property tax because we don't know yet how that will be applied, but as to the household charge (HHC), it was correct to pay for both properties. Irrespective of planning conditions, it would be deemed a separate dwelling in much the same way as a landlord having a property sub-divided into flats -- the HHC is payable on each one.
The HHC is a self-declared tax, so the onus was on you to decide. However, the waivers and exemptions are very tightly controlled, applying mainly to local authority housing, ghost estates and the like.
If anyone feels they have paid the HHC inappropriately they can apply for a refund via the Local Government Management Agency (lgma.ie).
By the way, I note you said you paid both charges. It would be important that the HHC is seen to be paid by each dweller separately -- otherwise you might be deemed to have a second home -- and the Non Principal Private Residence charge (€200) might also apply!