Letting to relative at ‘uneconomic rent’

[banchang]

I have seen a few references to/questions on this topic, & thought l’d put this in a new thread rather than bolting onto another where it mightn’t be seen by others.

I have been through this with both Revenue & RTB - I’m renting to a close relative at below market rent. I called Revenue to clarify position & those on the line didn’t know, so they suggested putting the query in writing, which I did. 7 weeks later (2 weeks ago) I got a response. I got instant clarification from RTB in May. I was concerned about things I had read about non-deductibility of expenses where rental income is uneconomic. I thought this inequitable, if I had to pay tax on the (reduced) income, & feared I wouldn’t be able to deduct expenses from that. 2 key points

1. On the reduced profit generated by the ‘uneconomic rent’ Revenue replied that

“In the Guide to Rental Income under the section What expenses are not allowed?....it states:-

You cannot deduct the following expenses when you are calculating your rental profit or loss:

" expenses on premises rented out on an uneconomic basis, where it is not possible to make a profit from the rent received”.

That’s all they wrote. From this I am taking that if you are still generating a profit (which you likely are, albeit reduced) this is ok, & the expenses are deductible. If you are generating a loss, you will be challenged & they will not be deductible.

Separately the relative would be taking a gift equivalent to the difference between rent paid & market rate, & that would have to be declared for Capital Aquisitions Tax (note Eur3,000 exemption).

“You may receive a gift up to the value of €3,000 from any person in any calendar year without having to pay Capital Acquisitions Tax (CAT). This means that you may take a gift from several people in the same calendar year and the first €3,000 from each disponer is exempt from CAT.”


2. RTB were very helpful - they explained that if you are letting to family member you do not have to register the tenancy (NB relevant in Rent Pressure Zones where property is technically not rented for 2 years etc). RTB even suggested that I apply for a refund for the RTB registration fee I paid for this tendency with ‘uneconomic rent’.

Hope this helps.

 

[noproblem]

Well, revenue have given you your answers from all the written information you have given them. Might have been a better idea to have come on here first, although i'm not saying you would have been given any tax evasion information, you may have been able to get ways of avoiding paying too much.

 

[banchang]

Well, revenue have given you your answers from all the written information you have given them. Might have been a better idea to have come on here first, although i'm not saying you would have been given any tax evasion information, you may have been able to get ways of avoiding paying too much.

Thanks for reply. Anything you would suggest in this example which would legally avoid me paying too much ?

 

[noproblem]

As an example, if furniture was needed or maybe a fridge/freezer, etc, I do believe you could claim the cost back at the rate of 12.5% per annum for 8 years. Hope you understand?

 

[Sarenco]

Just on the registration point, any dwelling in which the spouse, parent or child of a landlord resides and no written tenancy agreement or lease is in place with anybody that resides in the dwelling does not need to be registered with the RTB.

 

[banchang]

As an example, if furniture was needed or maybe a fridge/freezer, etc, I do believe you could claim the cost back at the rate of 12.5% per annum for 8 years. Hope you understand?

Thanks, but the intent of my post was not to get into the minutiae of a standard rental income tax computation. That is well covered elsewhere in these forums.

As an aside, to your point, if the item is a ‘replacement of a domestic item’ eg a fridge, as in your example, you don’t have to wait 8 years to claim the relief on the cost of the replacement, but rather you can write off the total cost of the replacement in the current year. Important clarification to your advice. But I digress from my original point.

Hope you understand?

 

[torblednam]

Thanks, but the intent of my post was not to get into the minutiae of a standard rental income tax computation. That is well covered elsewhere in these forums.

As an aside, to your point, if the item is a ‘replacement of a domestic item’ eg a fridge, as in your example, you don’t have to wait 8 years to claim the relief on the cost of the replacement, but rather you can write off the total cost of the replacement in the current year. Important clarification to your advice. But I digress from my original point.

Hope you understand?

It must not be well enough covered, as the underlined is completely incorrect. You can claim a balancing allowance to claim any unused capital allowances (however many 1/8's remain unclaimed when the fridge dies).

The replacement fridge is its own asset and you claim capital allowances on it as normal.

 

[RETIRED2017]

It must not be well enough covered, as the underlined is completely incorrect. You can claim a balancing allowance to claim any unused capital allowances (however many 1/8's remain unclaimed when the fridge dies).

The replacement fridge is its own asset and you claim capital allowances on it as normal.

Are you saying a fridge costing lets say 1000E as an example only last say four years and needs to be replaced with 500 Euro written off can you claim the balance of 500 Euro against rental Income

 

[banchang]

It must not be well enough covered, as the underlined is completely incorrect. You can claim a balancing allowance to claim any unused capital allowances (however many 1/8's remain unclaimed when the fridge dies).

The replacement fridge is its own asset and you claim capital allowances on it as normal.

You must be unaware that this is established custom & practice for low value items in rental calculations. Revenue apply commonsense & those doing tax self assessments should do also - you don't have to re-capitalise a replacement microwave which cost E100 & depreciate it over 8 years, & the same applies to a fridge. This is not written anywhere but it is custom & practice. Do you think Revenue will ask you to redo your tax calcs if you explain that you have expensed a replacement fridge vs charging Eur40 per annum W&T ? They have bigger fish to fry.

However, if you want to capitalise a microwave, go ahead, they won't challenge that either.

 

[Galway21]

If you charge uneconomic rent does the landlord have to pay income tax on the value of the "gift"?

 

[RETIRED2017]

You must be unaware that this is established custom & practice for low value items in rental calculations. Revenue apply commonsense & those doing tax self assessments should do also - you don't have to re-capitalise a replacement microwave which cost E100 & depreciate it over 8 years, & the same applies to a fridge. This is not written anywhere but it is custom & practice. Do you think Revenue will ask you to redo your tax calcs if you explain that you have expensed a replacement fridge vs charging Eur40 per annum W&T ? They have bigger fish to fry.

However, if you want to capitalise a microwave, go ahead, they won't challenge that either.

I suspect orbiednam has the correct position if it got challanged,

 

[banchang]

If you charge uneconomic rent does the landlord have to pay income tax on the value of the "gift"?

No - the recipient has to pay gift tax (he's the one getting the gift, not the landlord, who is giving the gift) - subject to annual threshold exemption - see above.

 

[banchang]

I suspect orbiednam has the correct position if it got challanged,

See my comments above - there is commonsense & materiality applied to the tax law in Revenue. With limited resources they will pick their fights. But you are the one who signs your tax return, so as I say if you want to depreciate an Eur80 replacement microwave Eur10 x 8 years, that is your prerogative.

 

[Bronte]

Thanks, but the intent of my post was not to get into the minutiae of a standard rental income tax computation. That is well covered elsewhere in these forums.

As an aside, to your point, if the item is a ‘replacement of a domestic item’ eg a fridge, as in your example, you don’t have to wait 8 years to claim the relief on the cost of the replacement, but rather you can write off the total cost of the replacement in the current year. Important clarification to your advice. But I digress from my original point.

Hope you understand?

You're wrong. The fridge has to be depreciated over the 8 years. But if it dies in say year 2 you can write the entire cost off that tax year. That's my understanding of it. Not that I've ever bothered to do that. Where I do agree with you is that any item under 100€ I'm not depreciating as this is too tedious. Say a hoover for example. If I'm audited and the revenue guys really want to nit pick on this off with them redoing years of tax computations. And I don't supply microwaves.

 

[banchang]

You're wrong. The fridge has to be depreciated over the 8 years. But if it dies in say year 2 you can write the entire cost off that tax year. That's my understanding of it. Not that I've ever bothered to do that. Where I do agree with you is that any item under 100€ I'm not depreciating as this is too tedious. Say a hoover for example. If I'm audited and the revenue guys really want to nit pick on this off with them redoing years of tax computations. And I don't supply microwaves.

See subsequent explanations today above. According to the law you have to depreciate, but custom & practice, commonsense & materiality are applied. However up to the person signing the tax return as I have said.

You don't supply microwaves?

https://onestopshop.rtb.ie/beginning-a-tenancy/what-minimum-standards-must-a-property-meet/

 

[Bronte]

1. On the reduced profit generated by the ‘uneconomic rent’ Revenue replied that

“In the Guide to Rental Income under the section What expenses are not allowed?....it states:-

You cannot deduct the following expenses when you are calculating your rental profit or loss:

" expenses on premises rented out on an uneconomic basis, where it is not possible to make a profit from the rent received”.

That’s all they wrote. From this I am taking that if you are still generating a profit (which you likely are, albeit reduced) this is ok, & the expenses are deductible. If you are generating a loss, you will be challenged & they will not be deductible.

That is my reading of that too.

Mandelbrot what do you think? Do you agree?

 

[Bronte]

See subsequent explanations today above. According to the law you have to depreciate, but custom & practice, commonsense & materiality are applied. However up to the person signing the tax return as I have said.

You don't supply microwaves?

https://onestopshop.rtb.ie/beginning-a-tenancy/what-minimum-standards-must-a-property-meet/

You keep quoting custom and practice and commensense and materiality. As though that changes things. I think it's pretty clear revenue would ignore a 30 Euro Toaster but not a 300 Euro fridge.

Nope, no microwaves, no tv's and no longer bedding either. Some don't even want dishes and cutlery anymore. And I only supply a dryer if there is no garden. Is that on the list as I didn't look.

 

[T McGibney]

You keep quoting custom and practice and commensense and materiality. As though that changes things. I think it's pretty clear revenue would ignore a 30 Euro Toaster but not a 300 Euro fridge.

A €300 fridge would yield a capital allowance of €37 annually. Utterly laughable to be capitalising items of this size, especially in the context of monthly rental income into four figures. Unless maybe you're doing an exam?

 

[Brendan Burgess]

Question answered.

OP - go to your accountant if your question has not been adequately answered.

Brendan