Renting rooms v Leasing house (landlord perspective)

bikefan123

Can someone look through the following example and see what I'm missing from a tax perspective when comparing the following two option for rental income in a house I own.

Mortgage repayments = €1200/month.


If I were to lease full house, I would receive €1100. From reaidng threads, I nee dto register with revenue as a landlord (+fee). I can deduct 75% of interest on mortgage (~€300/month), any property fees and 12.5%/year depreciation on item inside house (assume €100/month), so have remaining €700 taxable, so at marginal rate of ~50%, this means €350 tax due a month. So total net spend on house woudl be €350 tax+ €100 expenses +€100 to offset different between rent received and mortgage due. So in total, it woudl cost me €550/month = €6600/year, then with rental costs for myself as extra.

If I live in the house, I do not need to register as landlord, and can earn up to €10000 interest free, any extra as taxable income. So assuming I could earn €800/moth renting spare rooms, then I receive €9600 tax free.

Does the above sound right, as seems very punitive for lease option veruss the live in landlord, so assume I am missing something substantial.

Can anyone see what I'm doing wrong with above?

The_Morrigan

For the rent a room scheme all income inclusive of contributions for bills, food etc has to come under the 10k, so for ease of declaration find an all inclusive amount.
If you go over the 10k you pay tax on the whole amount, not just the excess.

bikefan123

The_Morrigan wrote: »

For the rent a room scheme all income inclusive of contributions for bills, food etc has to come under the 10k, so for ease of declaration find an all inclusive amount.
If you go over the 10k you pay tax on the whole amount, not just the excess.

Thanks for the clarification.

My preference was to move to a new location (family reasons), whilst servicing the mortgage on existing place as best I could. Hadn't realised that it would cost so much, and that the negative equity (as is huge) is ignored, from a tax perspective.

What hope of this government ever doing anything to sort out this mess, because its obvious that banks won't do it on their own.
I'm sure the government could incentivise people caught in the negative equity trap without costing the country too much in losses in tax. I'd imagine the losses in one aspect would be gained elsewhere, and would allow money to start circulating in economy, however fat chance of anything like that happening for a few years.

Pawwed Rig

bikefan123 wrote: »

If I were to lease full house, I would receive €1100. From reaidng threads, I nee dto register with revenue as a landlord (+fee).

You would need to register with the PRTB rather than Revenue. Cost is €90 (deductible). WRT Revenue you will be required to fill out a tax return (form 11), the cost of hiring an accountant is also deductible..

bikefan123 wrote: »

I can deduct 75% of interest on mortgage (~€300/month), any property fees and 12.5%/year depreciation on item inside house (assume €100/month), so have remaining €700 taxable, so at marginal rate of ~50%, this means €350 tax due a month.

Correct but don't forget about NPPR (although this is the last year for that terrible piece of legislation). Also it is not clear whether you can deduct the new property tax or not. I would imagine not though.
€100 a month for capital allowances seems a bit low imho. That values all of the furniture in your house at €9,600.

bikefan123 wrote: »

So total net spend on house woudl be €350 tax+ €100 expenses +€100 to offset different between rent received and mortgage due. So in total, it woudl cost me €550/month = €6600/year, then with rental costs for myself as extra.

Seems quite high. I would expect you should have more deductions than what you think ie maintenance/extra capital allowances. It looks like you have a relatively low mortgage compared to the value of the house yet have a house in a decent enough area which may explain the higher tax.

bikefan123 wrote: »

If I live in the house, I do not need to register as landlord, and can earn up to €10000 interest free, any extra as taxable income. So assuming I could earn €800/moth renting spare rooms, then I receive €9600 tax free.

Yes. You still need to declare the income to Revenue.

The rent a room was relief that is not based on the value of the property so that is why your calculations may look a bit strange.

The_Morrigan wrote: »

For the rent a room scheme all income inclusive of contributions for bills, food etc has to come under the 10k, so for ease of declaration find an all inclusive amount.
If you go over the 10k you pay tax on the whole amount, not just the excess.

Bills can be seperated and paid non inclusive to the €10,000. The legislation only mentions 'meals, cleaning, laundry & other similar goods and services' which are supplied. That is if the landlord is dumb enough to clean up after the tenants and wash their clothes then a value should be put on that for tax purposes. If you have a clear rota system you will be ok here.
Morrigans warning is very relevant though as if you earn the €10,001 you will will be taxed ar (say) 52% of that ie €5,200. You lose the relief completely if you exceed the stated amount.

Edit - Insurance is also deductible

The_Morrigan

http://www.citizensinformation.ie/en/housing/owning_a_home/home_owners/rent_a_room_scheme.html

PR I've always taken my lead from citizens information who do state utilities etc are included, so followed that advice.

D3PO

Pawwed Rig wrote: »

Bills can be seperated and paid non inclusive to the €10,000. The legislation only mentions 'meals, cleaning, laundry & other similar goods and services' which are supplied.

Utilitied like ESB, Internet, UPC etc are services supplied and as a result their portion of these services that are paid for are absolutely part of the 10k income limit.

odds_on

Apart from the tax perspective you should also take into your thoughts and calculations the following when renting the house:
What if your tenant fails to pay the rent - the process of evicting a tenant can be lengthy, and there could be a substantial financial loss especially if the tenant decides to overhold. You must also know all the laws (RTA 2004) extremely well as you will be considered as running a business. Ignorance of the law will be no excuse. Any slip up could cost you thousands. Tenants have many rights.

As a landlord renting out rooms in your own house, is much simpler; you rule the roost and any problem with a lodger/licensee can be dealt with immediately. There is no required period of notice so in serious cases of problems you could tell the lodger to leave immediately. However, an accepted notice period is the same period as paying the rent - rent paid weekly - a week's notice, monthly rent, a month's notice.

Pawwed Rig

If I am wrong here I am happy to hold my hands up as I don't work in this area of tax but from my reading of the legislation

“relevant sums” means all sums arising in respect of the use for the purposes of residential accommodation, of a room or rooms in a qualifying residence and includes sums arising in respect of meals, cleaning, laundry and other similar goods and services which are incidentally supplied in connection with that use;

This is the only reference to 'extras' in section 216A. I think it would be a stretch to include utilities here as you would imagine if they should be included they would have been mentioned specifically. I can see a case for it if the owner occupier rents the rooms for €10K and then informs the tenant that he will pay the utilities aswell or indeed where there is an all inclusive agreement. However I cannot see any sense in including a persons share of a bill as a relevant sum. Having said that tax law does not always make sense or there may have been some case law or some Revenue guidance on this. I would be interested D3PO if you had another source for this. I accept what Morrigan is saying in that it is covered in the http://www.citizensinformation.ie/en...om_scheme.html and they specifically mention utilities but I wonder where they got this information from.

Please advise so I can look into it further. I might open a thread in the tax forum on this.

D3PO

Pawwed Rig wrote: »

I would be interested D3PO if you had another source for this. .

I rented out rooms many years back. Even though I had no taxable liability before sending my returns in I rang the revenue to query this so as I had the right figures on the form.

They advised me that all income received for utilities had to be declared. So my source is from the revenue phone line

The_Morrigan

I wonder would it stem from the fact that in a rent a room scheme the bills are all in the landlords name and therefore they are providing the services, whereas in a lease agreement the tenant is solely responsible for the bills and typically has them in their own names.

D3PO

The_Morrigan wrote: »

I wonder would it stem from the fact that in a rent a room scheme the bills are all in the landlords name and therefore they are providing the services, whereas in a lease agreement the tenant is solely responsible for the bills and typically has them in their own names.

I don't know perhaps so yes. Either way 10k with utilities is still a generous tax free sum.

you should be able to keep your rent a room below that without any trouble unless its a large house with many rooms rented out tbh.

Pawwed Rig

I suppose it would be an idea to put some of the bills in the tenants name if you were going to be close to the limit. It doesn't make sense to me though. Anyway rather than derail the thread further I will look into it further and let you know if I find anything.