Landlords - Negative Cashflow but Making a Profit.

The Student

Marcusm wrote: »

It is the receipt of the cash as rent which increases retained earnings. Whether that cash is held as cash or used to discharge debt does not impact on earnings. There is no causative relationship between the discharge of debt and earnings. There is a causative relationship between rent and earnings!

If you are reducing you non current liability you have to balance your balance sheet. Retained earning are previous years profits that were not shared as dividends to shareholders.

If you make a loss in a given year via your p & l and you still give a dividend you use your retained earnings to pay the dividend

dubrov

I'll let you guys argue the accounts that are debited/credited.

However, you have shown that a landlord with negative cashflow can still make a profit in the accounting and real world which was the original point.

Marcusm

The Student wrote: »

If you are reducing you non current liability you have to balance your balance sheet. Retained earning are previous years profits that were not shared as dividends to shareholders.

If you make a loss in a given year via your p & l and you still give a dividend you use your retained earnings to pay the dividend

You use an asset (cash) to reduce a liability (debt). This has no impact on earnings.

You earn income and it increases both your assets (cash or receivables) and your retained profits.

Eric Cartman

3DataModem wrote: »

If the mortgage is reducing by more than the money leaving your account, then you are making money, even if the property is not changing in value. That's not an opinion, just maths.

Of course it is preferable for a property to "wash its face" from a cashflow perspective, but that's not the reality for the majority of taxpaying small landlords.

in theory yes, but you've no idea how far along a landlord is, if it was month 1 of year 1 of the mortgage, rent would have to be basically twice the mortgage payment for the landlord to make a cent. as time goes on the profit grows but in general rent has to be twice what a mortgage payment is to let the landlord turn any profit.

if the rent (after tax) can't cover the full payment id consider it a bit of a raw deal though. People get in to property for the same reason they invest in fast food franchises, petrol stations etc... money now. If everyone wanted to wait we'd have acres of olive groves and apple trees.

dubrov

Eric Cartman wrote:

if the rent (after tax) can't cover the full payment id consider it a bit of a raw deal though. People get in to property for the same reason they invest in fast food franchises, petrol stations etc... money now. If everyone wanted to wait we'd have acres of olive groves and apple trees.

You only get taxed on profits. No profit means no tax.

To make a profit, the rent (income) has to be greater than expenses. Only the interest part of the mortgage payment is an expense.

Ray Palmer

dubrov wrote: »

I'll let you guys argue the accounts that are debited/credited.

However, you have shown that a landlord with negative cashflow can still make a profit in the accounting and real world which was the original point.

No you haven't proved that. You areihnoring accounting principles.

No mention of costs to selling to say when in your vision of "profit" happens.

If the property loses value and in negative equity you are saying they are in "profit"

A positive balance sheet does not mean profit.

This is where you are going wrong by harping on about a positive being profit. Profit in business has definition and you want to change the definition to a simplistic common language. People use many words in common use that do not mean the same thing in correct context. The same way people misuse the theory of evolution to say it isn't true and just a "theory" . That is what you are doing here.

dubrov

Ray Palmer wrote: »

No you haven't proved that. You areihnoring accounting principles.

No mention of costs to selling to say when in your vision of "profit" happens.

If the property loses value and in negative equity you are saying they are in "profit"

A positive balance sheet does not mean profit.

This is where you are going wrong by harping on about a positive being profit. Profit in business has definition and you want to change the definition to a simplistic common language. People use many words in common use that do not mean the same thing in correct context. The same way people misuse the theory of evolution to say it isn't true and just a "theory" . That is what you are doing here.

In fairness, it has been stated several times on this thread that the accounting profit due to asset depreciation/appreciation is not realised until the asset is revalued or disposed of. As a landlord there is no incentive to revalue until the property is sold as capital gains tax would apply. In general properties appreciate in value so this would add to the overall profit.

Are you arguing that profit for a period is not equal to income less expenses?
Income is based on rental income and expenses include upkeep and interest.

Some/all of that income is used to pay down the mortgage debt and although that transaction doesn't create a profit (cash decreases and debt decreases), that reduction in debt is where most of the profit ends up.

Eric Cartman

dubrov wrote: »

You only get taxed on profits. No profit means no tax.

To make a profit, the rent (income) has to be greater than expenses. Only the interest part of the mortgage payment is an expense.

In other sensible countries the whole payment is ore tax which would allow landlords to reduce rents considerably overnight while still making profits, with our current system landlords neet to charge far too much to break even (cashflow) year to year. As many landlords are retirees, they have no other source of income to ‘break even’ on paying 0 off the capital.

And before the usual suspects ‘BuT LaNdLoRdS R AlL GrEeDy N wUlDnT DrOp ThE ReNt’ , they would , its just too expensive to do so at present.

Marcusm

Eric Cartman wrote: »

In other sensible countries the whole payment is ore tax which would allow landlords to reduce rents considerably overnight while still making profits, with our current system landlords neet to charge far too much to break even (cashflow) year to year. As many landlords are retirees, they have no other source of income to ‘break even’ on paying 0 off the capital.

And before the usual suspects ‘BuT LaNdLoRdS R AlL GrEeDy N wUlDnT DrOp ThE ReNt’ , they would , its just too expensive to do so at present.

Please let me know which countries these might be which give a tax deduction for the capital repayment of a loan.

The Student

Marcusm wrote: »

Please let me know which countries these might be which give a tax deduction for the capital repayment of a loan.

This is your depreciation charge on buildings in company accounts.

Marcusm

The Student wrote: »

This is your depreciation charge on buildings in company accounts.

That is a non-sequitur as it is unrelated to whether or not it was acquired by borrowings or not. More importantly, please let me know which jurisdictions give tax relief for depreciation charges in accounts for (1) all buildings and (2) residential properties.

The Student

Marcusm wrote: »

That is a non-sequitur as it is unrelated to whether or not it was acquired by borrowings or not. More importantly, please let me know which jurisdictions give tax relief for depreciation charges in accounts for (1) all buildings and (2) residential properties.

A depreciation charge is an expense in your p & l which like all other expenses are deducted from gross profit to arrive at net profit. You pay tax on net profit ergo you have not paid tax on the depreciation charge. Only when you come to dispose of company buildings do you pay tax on the sale value. Have a look at a set of company accounts bal sheet and you will see the buildings carrying amount and the yearly and accumulated depreciation charge.

A landlord is not allowed depreciate a property through his p & l and can only expense interest through the p & l.

Marcusm

Marcusm wrote: »

Landlord are not treated differently to other businesses!

They are, they cannot write half the things that other business get away with and more so they are scrutinised far more for what they do claim.

The Student

dubrov wrote: »

In fairness, it has been stated several times on this thread that the accounting profit due to asset depreciation/appreciation is not realised until the asset is revalued or disposed of. As a landlord there is no incentive to revalue until the property is sold as capital gains tax would apply. In general properties appreciate in value so this would add to the overall profit.

Are you arguing that profit for a period is not equal to income less expenses?
Income is based on rental income and expenses include upkeep and interest.

Some/all of that income is used to pay down the mortgage debt and although that transaction doesn't create a profit (cash decreases and debt decreases), that reduction in debt is where most of the profit ends up.

Actually a number of years profit can be wiped out if a property is in negative equity to a greater amount than the net profit earned for all periods of ownership.IE if you have to make up the negative equity shortfall then you have made an overall loss.

davindub

The Student wrote: »

A depreciation charge is an expense in your p & l which like all other expenses are deducted from gross profit to arrive at net profit. You pay tax on net profit ergo you have not paid tax on the depreciation charge. Only when you come to dispose of company buildings do you pay tax on the sale value. Have a look at a set of company accounts bal sheet and you will see the buildings carrying amount and the yearly and accumulated depreciation charge.

A landlord is not allowed depreciate a property through his p & l and can only expense interest through the p & l.

Generally only industrial type buildings are depreciated.

And depreciation is added back before calculating corporate or personal tax. You can claim capital allowances on industrial buildings but if you sell for greater than the tax written down value, there is a balancing charge (i.e. capital allowances reversed). Which would happen in the majority of cases where residential property is concerned.

Marcusm

The Student wrote: »

A depreciation charge is an expense in your p & l which like all other expenses are deducted from gross profit to arrive at net profit. You pay tax on net profit ergo you have not paid tax on the depreciation charge. Only when you come to dispose of company buildings do you pay tax on the sale value. Have a look at a set of company accounts bal sheet and you will see the buildings carrying amount and the yearly and accumulated depreciation charge.

A landlord is not allowed depreciate a property through his p & l and can only expense interest through the p & l.

Most countries tax systems do not permit the deduction of accounting depreciation but have a separate system of tax depreciation; Ireland calls it capital allowances. In most cases there are limited opportunities for tax depreciation on buildings and very rarely for residential properties. Ireland had a limited scope system for this in urban renewal relief areas, seaside resorts etc.

Irrespective, it is still not the granting of a deduction for the writing off of the capital element of loan repayments.

Marcusm

Regina Most Applesauce wrote: »

They are, they cannot write half the things that other business get away with and more so they are scrutinised far more for what they do claim.

Can you provide some specifics as to what these things might be which other businesses can write off? The tax charge on rents is on the profits or gains arising in a year and is computed on the same basis as any trading business. Revenue expenses which are incurred In the business of letting (section 97 TCA 1997).

Eric Cartman

Regina Most Applesauce wrote: »

They are, they cannot write half the things that other business get away with and more so they are scrutinised far more for what they do claim.

This, being s residential landlord in Ireland has almost none of the advantages that a normal business runs or even a residential landlord (wrapped in a company) receives in other countries.

dubrov

Eric Cartman wrote:

This, being s residential landlord in Ireland has almost none of the advantages that a normal business runs or even a residential landlord (wrapped in a company) receives in other countries.

Can you give an example of how a landlord has a disadvantage versus s normal business?

Marcusm

Marcusm wrote: »

Can you provide some specifics as to what these things might be which other businesses can write off? The tax charge on rents is on the profits or gains arising in a year and is cjomputed on the same basis as any trading business. Revenue expenses which are incurred In the business of letting (section 97 TCA 1997).

Just take one example. How many small 1/2 property LL are claiming capital expenses on their car or writing off a portion of all motoring expenses (tyres, servicing etc) against their overall tax bill?

Almost none and if they were they would be gone though with a fine tooth comb. Most other small business, particularly say farmers etc would be claiming up to 70% of their car against business use and it might never do a single thing related to the farm but it’s standard and accepted. I see this from personal experience so I know this is what happens.

The Student

davindub wrote: »

Generally only industrial type buildings are depreciated.

And depreciation is added back before calculating corporate or personal tax. You can claim capital allowances on industrial buildings but if you sell for greater than the tax written down value, there is a balancing charge (i.e. capital allowances reversed). Which would happen in the majority of cases where residential property is concerned.

All companies that own and use buildings in the course of business can claim capital allowances as a cost of business. Be it a hotel, shop, office block. This cost is incurred to produce the product/service.

However a landlord can't avail of a capital allowance on the property even though it is a requirement to provide the service. Exactly the same as a hotel! If you don't have a property you can be a hotel.

Depreciation is not added back for corporate tax as it is an expense in company accounts. There is no allowance for personal tax so would not be added back.

A person may have capital gains liability when the sell the asset. The company will also have a tax liability if the sale value of the building if its value is higher than its carrying amount inclusive of all capital allowances

dubrov

Regina Most Applesauce wrote: »

Just take one example. How many small 1/2 property LL are claiming capital expenses on their car or writing off a portion of all motoring expenses (tyres, servicing etc) against their overall tax bill?

Almost none and if they were they would be gone though with a fine tooth comb. Most other small business, particularly say farmers etc would be claiming up to 70% of their car against business use and it might never do a single thing related to the farm but it’s standard and accepted. I see this from personal experience so I know this is what happens.

I don't agree with the farmers claiming their private vehicles as an expense but that is a different topic.
A landlord with 1/2 properties is realistically making only a few trips a year. The associated expenses are in the tens, not hundreds.

A landlord with a large number of properties should be able to claim some of this an an expense.

The Student

dubrov wrote: »

I don't agree with the farmers claiming their private vehicles as an expense but that is a different topic.
A landlord with 1/2 properties is realistically making only a few trips a year. The associated expenses are in the tens, not hundreds.

A landlord with a large number of properties should be able to claim some of this an an expense.

The point the poster is making that other businesses can claim expenses incurred in the business the landlord can't.

The car example was just an example.

dubrov

The Student wrote: »

The point the poster is making that other businesses can claim expenses incurred in the business the landlord can't.

The car example was just an example.

There is a thread here saying you can claim expenses for car trips as a landlord as long as you can justify it to Revenue.

It sounds like collecting monthly rent doesn't count as EFT is an option. The average landlord would reasonably be able to justify 20-30 Euro per year in expenses.

Pkiernan

dubrov wrote: »

Can you give an example of how a landlord has a disadvantage versus s normal business?

Government enforced price controls.

Illegal to match competitors rent in RPZs

Inability to terminate a contract when rent isn't paid.

Unable to use the Courts to resolve disputes.

LPT not taxdeductible.

Browney7

The Student wrote: »

All companies that own and use buildings in the course of business can claim capital allowances as a cost of business. Be it a hotel, shop, office block. This cost is incurred to produce the product/service.

However a landlord can't avail of a capital allowance on the property even though it is a requirement to provide the service. Exactly the same as a hotel! If you don't have a property you can be a hotel.

Depreciation is not added back for corporate tax as it is an expense in company accounts. There is no allowance for personal tax so would not be added back.

A person may have capital gains liability when the sell the asset. The company will also have a tax liability if the sale value of the building if its value is higher than its carrying amount inclusive of all capital allowances

So are you advocating that a LL pays income tax at marginal rate between the purchase price and the written down value in the event that the property is sold for more than the written down value and CGT on the remaining difference (if applicable) between sale price and initial purchase price if the property goes up in value compared to purchase price?

Marcusm

Regina Most Applesauce wrote: »

Just take one example. How many small 1/2 property LL are claiming capital expenses on their car or writing off a portion of all motoring expenses (tyres, servicing etc) against their overall tax bill?

Almost none and if they were they would be gone though with a fine tooth comb. Most other small business, particularly say farmers etc would be claiming up to 70% of their car against business use and it might never do a single thing related to the farm but it’s standard and accepted. I see this from personal experience so I know this is what happens.

A 1/2 property landlord can’t claim the costs of travelling to the properties as those are essentially the place of business. If they were mostly a landlord, had an identifiable premises from which the business was carried out, office for collections, appraisals etc it would be different.

Farmers are about the worst example you could pick as all those tax assumptions are based on agreements many years ago when farmers were mostly full time and the vehicles were principally used for collecting fees, bringing animals to mart etc. That has changed but the IFA/ICMSA/IFAC lobby group is too strong to force change through.

Shopkeepers would not claim relief for expenses for travelling from home to the shop, would suffer a disallowance for private use of goods vehicles etc, all based on a requirement to keep records which is rarely imposed on farmers. Painters, electricians, plumbers etc would all be required to do this.

In most cases, landlords incur few expenses in managing properties which are not eligible for tax relief.

Marcusm

The Student wrote: »

All companies that own and use buildings in the course of business can claim capital allowances as a cost of business. Be it a hotel, shop, office block. This cost is incurred to produce the product/service.

However a landlord can't avail of a capital allowance on the property even though it is a requirement to provide the service. Exactly the same as a hotel! If you don't have a property you can be a hotel.

Depreciation is not added back for corporate tax as it is an expense in company accounts. There is no allowance for personal tax so would not be added back.

A person may have capital gains liability when the sell the asset. The company will also have a tax liability if the sale value of the building if its value is higher than its carrying amount inclusive of all capital allowances

I don’t know what you are studying but I assume it is not tax, law or accountancy. No capital allowances for the fabric of a building for use as a shop or an office block for example. Industrial buildings (factories and other things which are similarly treated like docks etc) qualify and so too do hotels but not shops, offices or residential homes except where there are incentives such as existed in the original IFSC etc.

Depreciation is added back and the appropriate capital allowances, if any is claimed.

By the way, you still have addressed the issue of the deduction for the capital element of mortgage repayments. My advice, stop digging and try to get out if the hole.

davindub

The Student wrote: »

All companies that own and use buildings in the course of business can claim capital allowances as a cost of business. Be it a hotel, shop, office block. This cost is incurred to produce the product/service.

However a landlord can't avail of a capital allowance on the property even though it is a requirement to provide the service. Exactly the same as a hotel! If you don't have a property you can be a hotel.

Depreciation is not added back for corporate tax as it is an expense in company accounts. There is no allowance for personal tax so would not be added back.

A person may have capital gains liability when the sell the asset. The company will also have a tax liability if the sale value of the building if its value is higher than its carrying amount inclusive of all capital allowances

See page 2 here for common addbacks before calculating corporate tax:
https://www.cpaireland.ie/CPAIreland/media/Education-Training/Study%20Support%20Resources/F2%20Taxation/Relevant%20Articles/corporation-tax-computation-7-steps.pdf

More or less the same addbacks for personal tax.

See here for some of the allowed capital allowances:

https://www.revenue.ie/en/companies-and-charities/corporation-tax-for-companies/corporation-tax/capital-allowances-and-deductions.aspx

If you cannot find a capital allowance for the item you are depreciating, there is none available to be claimed. There are none available for retail units, office blocks, residential property, etc. Only industrial buildings.

Claw Hammer

Marcusm wrote: »

Can you provide some specifics as to what these things might be which other businesses can write off? The tax charge on rents is on the profits or gains arising in a year and is computed on the same basis as any trading business. Revenue expenses which are incurred In the business of letting (section 97 TCA 1997).

One major issue with rental income is that no deduction is allowed for contributions to a pension fund from it. If I own a shop and make a profit of 100k I can make a contribution to my pension fund and reduce my tax bill. If I make 100k in profit from rental property I cannot do the same thing.