Income Tax on Rent
Income tax is charged on rental income actually receivable in the calendar / tax year. Unlike the position with trading income, there is no reference year of assessment. There are no special rules relating to the commencement and cessation of rental income sources.
Income from all Irish property lettings is added together and taxes as a separate category. If losses arise, there is no tax and the deficiency can be carried forward and set off against future income.
The following categories of income are also taxable under the rent category
- Payments by the tenant under the lease for current expenses not the tenant’s responsibility
- Service charges
- Income from the use of land
- By way of licence
- Proportions of premiums
- Under certain circumstances rental the deposits
- under certain circumstances capitalised value of rental income
Expenses also include cost of goods and services provided as part of the letting arrangement.
Rental income from Irish property is subject to special rules. These rules do not apply to short-term holiday lets.
All income in Case D Schedule V is deemed to be from a single source, is aggregated and is dealt with collectively. This is an important principle under this head of taxation. Taxation commences when rent becomes receivable (not actually received). Rental income is tax on rents receivable, even if the rent it is not ultimately received. Cessation does not take place until the source of the income is disposed of.
Rental income and expenditure together with capital allowances are calculated per building. Rents from all Irish situate properties and receipts from Irish easements are aggregated and taxed under Case D Schedule V as if there were from a single source. Case D Schedule III applies to foreign income and “possessions”. Non-Irish source rental income is taxed under this heading.
Spouses are regarded as having different sources of Case D Schedule V income. Losses on the part of one spouse may not be transferred to the other.The death of the taxpayer is regarded as a cessation.
The are limited categories of deductible expenses deductions. The expenses incurred must the wholly and exclusively incurred in relation to the property. Capital expenditure (e.g. improvements versus repair) are not deductible.The following are the principal categories of deduction
- rent paid on the property (e.g. rent which the landlord pays where he holds under a lease);
- maintenance costs, re)pairs(but not capital expenditure);,
- insurance (building damage public liability et cetera)
- management (may include cost of management such as rent collection and dealing with day-to-day issues; is this may includeagents and employees depending on the circumstances)
- Service charges
- interest on money for the purchase, improvement and repair of the property;
- mortgage protection policy premium;
- fees for preparing accounts
- costs of a letting agent are generally be allowed.
Interest on money borrowed for the purchase improvement and repair of residential property is deductible. Interest on refinancing where the monies are not applied for this purpose is not allowed. Interest on bona fide refinancing an existing loan is permitted to the extent of the original loan.
Interest prior to the first letting and after is no longer available for letting is not deductible. Interest on loans to acquire the property from a spouse are not deductible.
If a capital sum is paid to fix interest over a period, the cost of the sum is spread as an interest equivalent over the relevant period.
Limits on the permitted deductions for residential properties, have been applied at various times in the past.Full deductibility has been consistently allowed in respect of commercial investment property.
The percentage deduction permitted has been increased from 75% to 100% between 2016 and 2021 for residential properties.100% deduction of interest has been allowed for commercial property for many years. Capital repayments are not deductible.
Finance Act 2016 amends the restriction introduced in 2009, of 75 percent of interest on borrowed money by way of deduction for purchase improvement and repair of residential accommodation. The relevant percentage was increased by 5 percent each year from 2017,reaching 100 percent in 2021.
For 2018 the permitted deduction was capped at 85 Per cent of such interest and section 97(2J) previously provided for a cap on deductibility of loan interest of 90 Per cent in 2019 and 95 Per cent in This section takes effect from 1 January 2019.
The deductibility of interest is conditional on the landlord/taxpayer complying with the Residential Tenancies Act. In particular, the landlord must register with the tenancy with PRTB. This must be confirmed in the landlord’s tax return.
RTB registration obligations does not apply in respect of commercial premises, including holiday lettings. It does not apply to former controlled lettings (but see 2015 Act), rent a room income, nor to lettings by housing authorities. Interest deduction is allowable in these cases without registration.
Fixture and Furniture
In the case of residential properties, there is an allowance in respect of the cost of furniture, fitting, carpets and curtains. This wear and tear allowance is allowed at 12.5% each year, over eight years. It is allowed evenly, on a straight line basis each year.
Where the gross rent is relatively small, Revenue may, by concession, grant an allowance equal to one twelfth of that rent, up to €254. This is an alternate to the calculation of actual expenses.
The general rule is that expenses are only allowed while the property is let. If part of the property is let, a proportionate amount is allowed.
Expenses incurred in the period between leases and tenancies may be deducted under certain conditions. The property must not be occupied by the landlord. The property must be ultimately re-let.
Expenses incurred prior to first letting are not permitted deductions. Deduction for pre-letting expense is allowed, where the property has been let but is not occupied between lettings.
Pre-letting auctioneers’ expenses and advertising and legal expenses incurred in the first letting against the rents arising on lettings are allowed. The expenses of negotiating a lease are allowable.
Finance Act 2017 provides that expenses incurred on a vacant residential property, prior to first letting after a period of non-occupancy are permitted as a deduction against rental income from that premises. Conditions apply. The premises must have been vacant for at least 12 months. The relief applies to the end of 2021.
Expenses must have been incurred in the 12 months before letting as residential premises. It must be such as would be allowed against rental income, if it had been occurred during letting.
The deduction is permitted, limited to €5,000 for vacant premises. The deduction is clawed backed if the premises cease to be that as residential premises within four months of first letting. Deductions so allowed are not permissible under any other provision.
Current not Capital
Expenses must be current or income in nature. Capital expenses are not allowed. Accordingly, the cost of improvements is not deductible.
The cost of maintenance and repairs is generally be deductible. Where expenses relate to let property and other property, an apportionment is made.
Losses and Allowances
If there is a loss under the rental category may be carried forward against future rental income. It cannot be set against other income nor carried back.. The loss must be used to the fullest extent.it is not permitted to use part of the loss and then use credit tax credits to reduce the liability.
There are restrictions on the use of losses arising from lettings at less than market value. They may not generally be carried forward
Capital allowances must be used in priority to losses carried forward. Some classes of allowances can be used against income generally. In most cases there are limits on the extent to which property type capital allowances can be offset against other income.
Generally, the order of deductions are as follows.
- capital Allowances
- Deductions from rental income
- The following are deducted from rental income net of expenses in the following order
- Unused Capital allowances brought forward from previous years
- Current capital allowances
- Losses brought forward
Losses on lettings at undervalue (for example to a connected person or otherwise) are not allowable. Losses on an entirety of Scheldule D Case V income is carried forward against Schedule D case V profits in the future.
The Revenue may, by concession allow losses on foreign rental income sources notwithstanding that this is subject to a different case (Schedule D Case III) and is not strictly allowed against domestic income (Schedule D Case V)
Losses on foreign property are not included as they are categorised separately to Irish property. Revenue allow losses to be brought forward against income from the same foreign property.
Finance Act 2013 providers that a loss on foreign rental income may not be offset against other foreign investment income. However losses on foreign rental income may be offset against profits on foreign rental income.
Generally capital costs are not deductable. Capital allowances are available only in respect of industrial buildings (usually factories) and hotels. In this case, the capital allowances are in respect of expenditure incurred on the construction element. The landlord must be responsible for repairs.
See the sections on capital allowances. Expenditure on plant machineryand equipment may qualify for capital allowances. The burden of wear and tear must rest with the landlord. This means that the landlord must suffer the economic cost of the use and deterioration of the asset. The landlord must be obliged to replace the asset if it is beyond repair..
Formerly many incentive schemes provided for capital allowances but most have been phased out. See the separate chapters in this regard.Many of the property type reliefs are subject to the higher earners restriction.
There is an allowance of 12.5% over eight years on fixtures and fittings. Where rent is small, Revenue will allow a rent allowance of 1/12 of gross rent up a maximum of €254.
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