Being an accountant and board member of the Residential Landlords’ Association, I get many people asking me if they should invest in property.
Well don’t dive in feet first, I say! Careful planning and calculations of return on investment should be carried out before you make your decision.
With 30% of existing landlords planning their exit from the rental sector, there are pros and cons to the investment property market.
General Property Issues
- Speculation of increasing property prices will attract many investors – including myself, but many other issues need to be considered including the Residential Tenancy Act 2004 and Residential Tenancy (Amendment) (No. 2) Bill 2012.
- Mandatory Registration with the PRTB (Private Residential Tenancy Board) when renting a property (€90). Register your tenant and once he/she is six months in the property, the tenant has right to stay up to 3.5 more years. Be careful who you let in!
- PRTB are introducing a Deposit Retention Scheme – PRTB will hold onto deposits. How easy will it be to keep a ‘bad’ tenant’s deposit?
- PRTB have also recommended minimum BER rates on properties and an ‘NCT-type’ suitability compliance test every three years. What costs will be involved in ensuring compliance?
Home Renovation Scheme
In my Budget submission to Government (in my capacity as board member of the RLAI), I requested, among other things, that the Home Renovation Scheme* be extended to the rental sector.
*This is where 13.5% of the cost of refurbishment of properties can be claimed back in tax. This is allowable until the end of 2015.
It has in fact since been extended from January 2015 (thanks Minister Noonan but more needs to be done to encourage investment into the sector!).
With housing in short supply, some incentives may be introduced but when and what restrictions will there be?
Remember Section 23 incentives? Governments then increased taxes minimising the relief that was supposed to be allowed and cut the mortgage interest relief to 75% thus crucifying those that borrowed hundreds of thousands to buy into these schemes. Not to mention the additional NPPR, waste, water and property charges!!
GUIDE TO PROPERTY RELATED TAXES
Local Property Tax: FINANCE (LOCAL PROPERTY TAX) ACT 2012
An annual self-assessed Local Property Tax (LPT) is an annual tax charged on the market value of all residential properties in the State. The amount of tax charged depends on the value to the individual property.
The value is calculated by multiplying the mid point of the band by 0.18%. Rates for properties valued at €1million or more are calculated at 0.18% for the first €1m and 0.25% for amounts over €1m.
Examples of the bands are outlined below:
|Valuation Band||Mid Point||LPT Charge|
|€0 to €100k||€50k||€90|
|€100 to €150||€125k||€225|
|€250 to €300||€275k||€405|
|€450 to €500||€475||€855|
The owner of the property is liable for the LPT. The date of ownership for the 2014 charge is 1st November 2013.
Payments can be made by cheque, direct debit, single debit payment, cash, credit or debit card, or through deduction from salary, pension or certain social welfare payments.
Some exemptions include residential mobile homes, vessels, properties subject to commercial rates, residential properties certified as having pyrite damage, properties purchased in 2013 (conditions apply) and properties in ‘ghost estates’.
If you let out a property, the income may be liable to Income Tax, USC and PRSI on the Rental Income, generally legislated for in Part 4, Chapter 8 TCA 1997
The tax will be calculated on the net income. This is the total rental income after allowable expenses. I have outlined an example of a rental tax calculation below.
Rental income will be assessed as part of your income tax for the year. The due date for submission and payments of returns is 31st October every year.
(Section 216A TCA 1997) Rent a Room Relief, which increased from €10,000 to €12,000 per year in budget 2015, allows you to rent rooms in your principal home up to €12,000 tax free.
>> See more information on rental income here
Example of Tax Treatment of Rental Property Investment
NOTE: The above taxable profit example is before capital repayments to bank, the property tax, and the 25% interest that is non-deductible.
Residential Water Charges
Water charges were initially introduced since 1st October 2014, with the first bills to be issued in January 2015 for the period October to December 2014.
The government have changed the billing and payments due to public pressure. The most up-to-date version of the charges are as follows:
Properties Not Metered
The charge for a household with one adult will be €160. For households with 2 or more adults, the charge will be €260. This applies for both water supply and wastewater supply.
In a case where either water supply or wastewater supply is required, the amounts above will be €80 and €160 respectively.
For properties that are metered, the charge will be the lower of the metered charge and the capped charges as outlined above.
- The capped amount applies until the end of 2018.
- There will be a water conservation grant of €100 per primary resident for customers who apply to Irish Water.
- Charges start from January 2015. Billing will start from April 2015 and will issue quarterly.
- Children will have free water.
Unoccupied properties will be liable to a flat charge of €125 (Water Supply and Wastewater) or €62.50 if only one service is required.
The person liable for the water charges is the occupier of the residence (rather than the owner, as is the case with the LPT). However, it is still unclear who is responsible in the absence of payment by the occupier. The RLAI are meeting Irish Water to discuss the issues with water charges vis-a-vis landlords. I will provide updates as new information becomes available.
Budget 2015 changes
Individuals can avail of a tax credit of 20% of the cost of water charges up to the value of €100 (i.e. 20% of charges up to €500). The credit will be claimed in the year after the charge is incurred.
Capital Gains Tax
Persons selling a property may be subject to capital gains tax at 33%.
This rate has increased from 20% in recent years due to changes in government attitudes (but less revenue has been received by the exchequer from capital taxes since the increase, so I am not convinced that this is working!).
Tax is payable on the gain upon sale of a property. The gain is calculated by deducting the cost and related cost of purchase from the proceeds from sale less the fees incurred in sale. Outlined below is a standard calculation of CGT.
Initial Period: 1st Jan to 30th Nov: Payment Date 15th December of same year
Latter Period 1st Dec to 31st Dec : Payment Date 31st January following year
Some exemptions include:
- No CGT on transfer of assets between spouses but spouse takes over original costs
- For assets purchased prior to 2002, indexation is allowed. This is a multiplier amount to reflect inflation changes up to 2003
- Private Residence (S. 604 TCA 1997): No CGT on increase in value of your main residence including garden of up to 1 acre. Is cases where property was main residence for part of the term of ownership, a proportion basis is used to calculate CGT
- Transfer of a site from parent to child (S. 603A TCA 1997): No CGT if you transfer a site to your child where the transfer is for the purpose of constructing a principal private residence on the site. The market value of the site must not exceed €500,000 and land may not exceed 1 acre.
- 7 Year Exemption: Introduced in Finance Act 2012 (section 64 inserting section 604A into TCA 1997 as amended (TCA). CGT relief for persons that purchased a property up to 31 December 2014 will be exempt for the first 7 years of the capital gain in value – must keep property for 7 years. Relief expires after 31/12/2014
- Retirement Relief (S. 598 TCA 1997)*: Does not generally apply to ordinary residential property. This relief applies where you dispose of certain ‘qualifying assets’. These include assets used for the purpose of a trade, profession or farming and shares in certain family trading companies. Person disposing must be at least 55 years of age at the time of the disposal and satisfy a number of other conditions. It is not necessary that you retire to claim the relief.
*I have suggested to Government that this relief be extended to the Rental Sector
CAPITAL GAINS TAX WORKED EXAMPLE
Capital Acquisition Tax
Persons receiving a gift or inheritance of property may be subject to capital gains tax (i.e. Gift Tax) at a rate of 33%.
Group A: €225,000 – Son / Daughter
Group B: € 30,150 – Parent / Brother / Sister / Niece / Nephew / Grandchild
Group C: € 15,075 – Anybody other that those above
In addition to this, €3,000 per year can be gifted tax free to any individual
CAT Payment Dates
Valuation date between 01/09/2013 to 31/08/2014: Payable 31st October 2014
Valuation date between 01/09/2014 to 31/08/2015: Payable 31st October 2015
Main Property Exemption: Dwelling House Relief (Section 86 CATCA Act 2003)
Gift or Inheritances of a dwelling house from 01/12/1999 are exempt from CAT once the following conditions are adhered to:
- The beneficiary must have occupied the house continuously as his only/main residence for a period of 3 years immediately prior to the date of the gift/inheritance. (If property replaced – must continuously occupied both properties as his/her only/main residence for a total period of 3 out of the 4 years immediately prior to the date of the gift/inheritance).
- Beneficiary must not have an interest or entitlement in ay other dwelling house
- The house must be owned by the disponer during the 3 year period as above
- The disponer must not have resided in the house for that period unless compelled by reason of old age (>65) or infirmity and be dependent on the services
- The beneficiary must continue to occupy that dwelling- house as his/her only/main residence for a period of 6 years after the date of the gift/inheritance. If replaced by other property, must continuously occupy both properties as his/her only/main residence for a total period of 6 out of 7 years from the date of the gift/inheritance.
Relief will be withdrawn if conditions not satisfied unless breach is due to result of long term medical care is required or if employer requires recipient to reside elsewhere.
Agricultural Relief and Business Relief : These may apply to property in limited cases.
Examples of CAT Calculation
Stamp Duty Consolidation Act, 1999
Stamp Duty applies at 1% on all residential properties with all other properties at 2%.
The buyer of the property is liable to make a stamp duty return and pay the property tax. This is generally processed by the solicitor involved in the purchase of the property and is due for payment within 30 days of the sale of the property.