More than one third of Ireland’s landlords are so called ‘accidental landlords’ according to a new study by the Private Residential Tenancy Board (PRTB).
The accidental landlords include those who bought property during the boom in which to live but found themselves unable to meet mortgage commitments.
Many moved back home to mum and dad while others went abroad to find work.
Many of the people who rent out their home don’t understand the tax burden that comes with it. In practice, owning a rental property is a bit like running a small business. You must keep records, file tax returns and be aware of the legal obligations placed on landlords.
A lot of people coming to us who wrongly assume that because they are paying off a mortgage they don’t have to file a tax return. They don’t understand that they have to pay tax at their higher rate of income tax and that they must also pay the universal service charge on rental income. What this means in practice is that, if you are showing a profit on your rental property, you could be taxed at 52% on this amount. To make things worse for some, many who bought property during the boom did so with interest only mortgages, which after a specified period, convert into full capital plus interest mortgages. This will substantially increase monthly outgoings.
While some landlords may just be coming to terms with settling a sizeable tax bill as a result of having never paid the Non Principal Private Residence or second-home charge, given that the NPPR tax amnesty ended on August 31st, others are turning their thoughts to an income tax return for 2013. Rental activities will often result in an individual paying tax despite not having made a “profit” on this activity. Despite the fact that rent is only a contribution against the mortgage repayments, 25% of the interest paid is disallowed. This can result in showing a false picture.
The good news for landlords who pay most of their tax in the PAYE system is that their tax bill won’t rise this year due to the imposition of PRSI.
The bad news for those who are self- employed is that this imbalance is set to continue for another year, and it comes in the context of additional charges such as the property tax, which was introduced last year.
This year’s deadline is October 31st for paper filings and November 13th for those who use the Revenue’s online ROS system, but one tax adviser’s advice is to get in well ahead of the deadlines – at least with your filing if not your payment.
We always recommend that you always prepare your tax return early in the year, even if you do not file it or make payment of the taxes until much later in the year.
Too late for this year, but good advice come January if you expect to be hit with PRSI for the first time next year.
Will I have to pay PRSI this year?
This depends on whether or not you’re self-employed. Since 1988, self-employed people have been paying PRSI on their total incomes, be that rental or otherwise. So if you’re filing a return for 2013 this October, you will have to pay PRSI (at 4 per cent) at this point.
The current situation is leading to an imbalance whereby those who have chosen – or who were forced by virtue of economic circumstances – to work for themselves, have a higher tax bill than those in the PAYE sector.
As a stark illustration of this, you could have a husband and wife who jointly own a rental property. The wife is self-employed and the husband is a PAYE employee. The wife would pay an additional 4 per cent (ie PRSI) on her share of the rental income compared to her husband, simply by virtue of her being self-employed.
However, this is set to change. If you’re a PAYE employee you will save this time around. But as PRSI is liable on rental income for everyone from January 1st, 2014, you must account for this when filing a return in 2015.
In addition, as you will pay preliminary tax for this year’s tax bill in October, according to the Revenue, “preliminary tax for the year 2014 should include all amounts due, including PRSI”. This means a 4 per cent increase in the amount you typically pay.
What will happen next year?
As of January 1st, 2014, PAYE workers who have rental income have also to pay PRSI on this “unearned” income. As tax returns are filed on a “previous year” basis, it means that, come October 2015, landlords who haven’t had to pay PRSI up until now will have to account for this extra charge in their returns.
However, not everyone may have to pay this additional tax – it will depend on how much so-called “unearned income” you generate.
If you are a PAYE worker and your net rental income is less than €3,174 you do not have to pay PRSI on your rental income, so if your property earns you less than €265.50 a month in net rental income, or €3,174 over the course of a year, you won’t have to pay an additional 4 per cent.
This means that those who let out a holiday home for a couple of weeks during the year will likely stay out of this additional tax net.
To see whether or not you will be hit by PRSI, a PAYE worker should calculate their rental profits for the year.
A rental income of €15,000 a year, for example, might give a landlord a “profit” of €8,500, after deductions and capital allowances (see panel). This would put them in the PRSI net. On the other hand, rental income of about €7,000 might result in “profit” of €3,150, so below the PRSI threshold.
If you are unsure as to your obligations please call us on 061-455601.