We have a two-bedroom apartment rented out for €800 per month in a rent pressure zone. We were a bit soft and did not increase it in the past as tenants were very good and we now cannot raise the rent by more than 2 per cent annually.
Our daughter has just graduated from college and started work on just over a minimum wage of €23,000 annually. She is looking for a place to stay in the same general area and finding it impossible to find anywhere. Prices are in the region of €800 per month for one bedroom in shared accommodation and two-bed apartments are from €1,500 upwards.
In two to three years’ time when our daughter’s salary will have increased and she should be able to afford to pay her own rent, we will be near retirement. We would most likely be putting the apartment back on the open market and could charge market rent, which I expect would be far in excess of the rent we are charging now.
What are the tax implications if we were to allow our daughter to stay in the apartment rent free for three years?
Ms MD
In a housing crisis, who owns property becomes a black and white issue. At present there is zero sympathy for landlords unless you happen to be in the same position. It puts people like you in a difficult position.
Many of us have at one time or the other been in the private rented sector and will have experience of landlords that is good and bad. There were always the money-grabbing ones who would consistently demand more money for accommodation that was of questionable quality and who would long-finger ad infinitum necessary repairs or maintenance to milk the last cent out of their tenants.
But there were also considerate landlords who, as you note, rewarded good tenants by freezing rent to encourage them to stay and were more responsive as issues arose.
Rent controls have queered the pitch. Landlords are now effectively obliged to increase rents to the maximum permitted under the legislation as failure to do so will limit their future income from the investment. No allowance can be made for accommodating particularly good tenants, which seems counterintuitive but there you go.
Of course it does need to be said that rent pressure zone rules are there precisely because some landlords were simply leapfrogging the market with rental demands, pricing tenants out of housing close to main economic centres.
More importantly, while tenants rights are somewhat stronger than they were in my day, there are several grounds on which a tenancy can be revoked quite easily. The most common of these cited regularly is because the landlord intends to sell the property — currently a political hot potato. But another one that features a lot is because the landlord needs the accommodation to house a family member.
The argument is also framed against a background of insufficient supply. Basically, we do not have enough homes. The population is growing and the lost decade after the financial crash means there are not enough properties available. Construction figures show that shortfall is still increasing despite years of housing policy initiatives for a range of reasons.
Lending constraints and the attraction of fast-rising rents and tax incentives in the Irish market have attracted institutional investors in recent times. Investing in new properties and with proper administrative structures, there are far fewer issues with quality for tenants even if space is an issue but everything is very much a bottom line decision — everything has a price.
Now your daughter is starting out in work. On a €23,000 salary her take-home pay will be in the region of €1,700 a month so even at €800, her rent would be close to 50 per cent of her available resources before she paid a single utility or insurance bill, managed transport costs or bought any food.
I’m not saying it cannot be done. There will be people who get in touch to tell me this is exactly how they have to operate but no one will argue that it is other than a straitened financial position, with no margin for error, and very limited “living” in the broader sense of the word.
You have this accommodation to hand. Because of your previous decisions on rent, you are very circumscribed on what you can secure for it in the market — barely half the current market rent in the same area on the basis of the figures you provide. However, you are entitled to withdraw it from the market to accommodate a family member.
This has two effects. First it makes the property available for your daughter; secondly, providing she is there for more than two years, it will reset the clock on renting the property subsequently in the open market — assuming no future change in Government policy between now and then.
In other words, you will be able to rent the property out again at whatever the prevailing market rent is at that time. If you are saying it is currently €1,500 a month as against the €800 or so you can secure under rent pressure zone rules, rental inflation indicates it will be well over double the most recent rental income you secured. That will provide a better income to you as you near retirement, even with the tax on any income earned and the costs involved in renting out property.
Meantime, you can provide accommodation for your daughter in an area that suits her and is convenient to her job. However, allowing her to stay there rent free does have implications.
Effectively you are gifting your daughter use of the property. Rules on gifting to adult family members were changed in 2014 to stop certain abuses that meant wealthy parents were funding their offspring’s lifestyle. Any rent-free period granted to your daughter is seen as a financial gift and will be set against her lifetime tax free limit on gifts from you, her parents.
And, importantly, the level of this gift will not be the €800 you can secure on this apartment on the open rental market in the rent pressure zone, but the €1,500 “market” rent for a two-bedroom apartment in that area, or whatever the market rent is. You’ll likely need to get a rent valuation done so that you and she are clear on the sums involved.
Assuming it is €1,500 a month, your gift to your daughter in allowing her to stay in this apartment is €18,000 a year. Between you, you and your husband/partner can gift your daughter €6,000 a year under the small gift exemption — €3,000 from each of you. This means the taxable amount will be €12,000 a year.
Over the three years you envisage her staying there, that amounts to €36,000, though it will presumably be a bit higher as the size of the gift will increase each year in line with the market rent for that type of property in that area — and not just by the 2 per cent maximum allowed under rent pressure zone rules. Assuming 7 per cent rent inflation annually, the figure would rise to just under €40,000.
As the rules and thresholds stand, your daughter can receive €335,000 over her lifetime tax free from you, her parents. If you pursue your intended path, she will still have about €295,000 of that threshold to play with when it comes to inheriting from either of you before she faces a tax bill.
Many Irish people are loath to tinker with this tax free threshold because it will increase the likelihood of their family facing a tax bill when they die. But if your daughter’s greater need is now, as regular readers of this column will know, I see little advantage in increasing her hardship or the stress on either side at this point for some potential gain in the future when she may or, more likely, may not have as great a need for support.
Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street Dublin 2, or by email to dominic.coyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice
