With just over a month left to file tax returns for 2015, landlords across the country will be hoping for some reprieve on next year's preliminary tax bill in today's budget.
While an increase in the mortgage interest landlords are allowed to claim as a deduction against their tax bill has been mooted, it will not be clear until Minister for Finance Michael Noonan makes his speech later this afternoon.
Landlords have been increasingly vocal in recent times about the tax burden levied on the sector so, even if introduced, it may not offer as much relief as would be liked.
But with rents soaring to new highs, is it really fair for landlords to claim that they are still overburdened with tax?
Higher tax burden
In the past, the case for being a landlord was a lot clearer, but as the boom became a bust, the tax burden on landlords rose considerably. Mortgage interest relief, for example, was once deductible at 100 per cent but this was cut to 75 per cent in 2009. The imposition of property tax, which is still not allowed as an expense to offset tax liabilities, is another cost, while PRSI is also now levied on landlords’ rental incomes.
“In most other countries, it’s occupiers who pay property tax, not owners,” says Fintan McNamara of the Residential Landlords Association of Ireland, arguing that the tax “should at least be a deductible expense for landlords”.
PRSI is another issue, with McNamara noting that, as landlords get no benefit attached to the PRSI class from the 4 per cent rate they pay, the tax should be reversed on rental income.
Some suggest the rising tax burden has contributed to the rental crisis, as more and more landlords get out of the rental game by selling, with their properties then taken into the private ownership market. Rents may have risen, but so too has the tax burden.
"People talk about rents going up, but for every €100 the rent goes up, the landlord gets 48 per cent of it, and the Government gets 52 per cent," says Pat Davitt, chief executive of the Institution of Professional Auctioneers and Valuers (IPAV), noting that the level of tax is disincentivising new landlords from entering the market.
Speculation is mounting that the Government may start to row back on the decision to cap mortgage interest deduction for landlords at 75 per cent. It has been mooted that landlords will be able to offset 80 per cent of their interest against their tax bill in 2017, rising to 100 per cent over the next five years.
“Five per cent is very little but anything is helpful,” says Davitt, though he says the sentiment of such a move might be more meaningful. “It’s the recognition that they’re prepared to do something for landlords.”
He also says that the IPAV would like to see a tax allowance of €12,000 for landlords, similar to the rent-a-room scheme, and the abolition of universal social charge (USC) on rents.
Institutional landlords
Another issue is the arrival of institutional investors on the private rental scene, such as real estate investment trusts (Reits). Ireland’s biggest landlord, for example, with some 2,288 apartments rented or available to rent is one of these publicly listed vehicles, Ires Reit.
While intitutional players are growing in number, traditional landlords are still responsible for a greater number of properties, with about 170,000 landlords registered with the Private Residential Tenancies Board (PRTB) as of August 2015.
Introduced in the Finance Act 2013, Reits are subject to a different tax regime than individual landlords. This means that Reits are not subject to any tax on their rental income, nor are they subject to tax on their gains.
To qualify for this tax-exempt status, Reits must satisfy various conditions in relation to diversification, restrictions on leverage and income distribution. For example, Reits must have at least three rental properties, and they must distribute at least 85 per cent of their property rental income (90 per cent in the UK) to investors for each accounting period.
But has the tax pendulum swung too far in the direction of institutional investors?
“It’s very inequitable. You have a smaller landlord who is being really taxed out of it. They’re providing accommodation, a service and helping the Government out in a big way. If they weren’t there, the Government would have to provide it,” says Davitt,
McNamara also believes Reits have an “unfair advantage”, including the fact that they are able to buy blocks of apartments “at a knock-down price and are able to let them out at top dollar”.
“When you have that kind of advantage, it’s unfair competition,” he says.
Taxes on gains
Capital gains tax (CGT) is another area in which landlords feel hard done by. A Reit, for example, is typically exempt from this charge, provided that the gain is reinvested back into the Reit within 24 months from the date of disposal. (Irish resident investors will be liable to CGT on the disposal of their Reit shares).
On the other hand, if and when a landlord sells an investment property, they will be liable to CGT at a rate of 33 per cent on any gain they make on the property.
To assist landlords, the IPAV wants relief on CGT when a landlord sells a property with a tenant in situ.
“A lot of landlords are afraid that, with tenants in situ, they won’t get the open market price,” says Davitt, adding that if they are not going to get as much money as they would for vacant possession but were able to get a tax allowance on it, it might encourage them to sell a property with a tenant in situ.
For many tenants, being asked to leave if a landlord wants to sell the property has been a problem as it means they need to search for a new home in the already tight rental market.
Rising rents
However, while the tax burden on landlords has undoubtedly increased in recent years, so too has the critical metric on the other side of the scales: rents.
On average, rents are now almost 10 per cent higher than they were a year ago. That means landlords – both institutional and individual – are generating a higher rate of return on their assets.
While landlords may lose as much as half of these gains to the exchequer, for many so-called “accidental landlords”, who may still be in negative equity, the gap, at least, in terms of having to subsidise their rental property, is narrowing further.
As figures from Daft.ie show, rents in Dublin are now an average of 5.2 per cent above their previous peak. In Cork and Galway cities, rents are 4 per cent and 10 per cent above levels recorded eight years ago.
Outside the cities, the average rent remains 5.5 per cent below peak levels, but has recovered strongly.
Another factor to remember is that about one in two of all properties on the rental market does not have a mortgage attached to it. So while the tax burden may be high, the cost of running them is not.
The countdown is on
The deadline for filing your 2015 tax return and paying preliminary tax for 2016 is Thursday, November 10th, meaning landlords need to sort out their receipts, evidence of mortgage interest and any other expenses they might have incurred last year as soon as possible.
Remember to include capital allowances. "Capital allowances are one of the most valuable deductions which are commonly overlooked by landlords," says Barry Flanagan, senior tax manager at Taxback. com.
Wear-and-tear allowances are available for the capital cost of fixtures and fittings (for example, furniture, kitchen appliances, etc.) provided to furnish rented residential accommodation.
The rate of wear-and-tear allowances for capital items is 12.5 per cent over eight years. So, for example, if you purchase a suite of furniture for €1,000, a capital allowance of €125 per year can be offset against the rental income for tax purposes for the next eight years.
Pre-letting expenses are not allowed, ie expenses incurred prior to the date the property was first let.
“There is an exception for auctioneer letting fees, advertising costs and legal cost expenses incurred prior to the date the property was first let,” Flanagan says.
For example, a property let at €1,000 a month will produce a rental income of €12,000 in a year. Allowable expenses – such as renovation work, 75 per cent of mortgage interest, management fees and home insurance – can then be subtracted from this. Assuming these expenses come to €2,000, the landlord is then liable for tax, at their marginal rate of income , on €10,000.
Also remember that PRSI, at a rate of 4 per cent, is liable on this income, along with the universal social charge (USC). This means that some landlords may still be subsidising their rental properties with their own money.
If you’re an Airbnb host (http://iti.ms/2dK00TA), remember that the above also applies to you.
“Most people will now be aware that Revenue has recently declared that short-term Airnb-type lettings will not qualify for rent-a-room relief,” says Flanagan.
This means that many hosts should be filing their first tax return, for income earned in 2015, this November.
If your income is below €3,174, however, you will only have to file a Form 12, rather than the longer Form 11. Note that this income threshold is set to rise to €5,000 from January 1st, 2016.
