Rental Income Excess - what to do

I

ImARebel

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Hi there,

We are currently renting our first property and we are wondering what to do with the rental excess each month

Should we put it off our new PPR?
Should we put it into a pension?

What's the most tax efficient/smart way to make the most of this money

here are the facts:

Monthly rental income 1200eur
Interest Only mortgage Payment 720eur (having read posts here on this site we decided to do this)
We are registered with PRTB

So far we have not spent a penny apart from to put some of the income off our management fees for 2007 (approx 400eur)

And an aside: The tenancy began in Sept 07, can we put the full amount of the management fees for the year (approx 1000) against the rental income? or would it have to be portioned out against the length of the tenacy eg (1000/12) * 4 and that being the max you could offset against the rental income?

Any help/advice will be appreciated and even if there are sites I can do further reading that would be great (although please don't point me to Revenue.ie I find it impossible to understand :eek:)
 
Maybe I am missing something obvious here - but why would you pay "an interest only mortgage" when you have the funds to meet regular repayments, my reading of an interest only mortgage was if funds were tight for a while - the principle will still have to be paid off at some stage so why not start today and save yourself some interest.

Other than that I would put the balance into a pension in order to cut down on the tax liability on the rental income.
 
In my opinion, the start of the tenancy is not what matters, it is when the house became available for letting, therefore the management fees are offset against the rent. You can carry forward the loss into 2008. You can also depreciate the fixtures of the house, kitchen and sanitary fittings, over an 8 year period. Also, insurance and repairs are tax deductible.

As for what to do with the excess, I would suggest maximising pension contributions, only then consider reducing loan on PPR but more likely I would suggest high yield current acc.

I think you should employ an accountant to get your tax affairs vis a vis the rental property properly set up, for the first year at least.

Slim
 
Based on the figures you have given, i.e. €720pm interest and approximately 5% rates, I think the property cost you around €175k

What type of property did you buy for €175k?
Is this an Irish property?

And how are you getting €1,200pm for this property?
Is this a market rental or a limited guaranteed rate?

It seems you have got a bargain but I would be amazed that you getting 8.5% gross yield, which is what you figures seem to indicate.
 
I would assume that the OP has bought a new property & is renting out their first one -is that correct.

If so, then you are doing the right thing by going "interest only" & use all available fund to direct to your PPR so you can use the interest to off-set against the rental income.

As said, AFAIK, you can take the current value of the furniture & write it off against as a capital allowance at 12.5%.

You probably also have insurance, which you can write off the proportional amount for when the property is rented (make sure you have advised the insurance company) this is the same with the management fees.

Other things which are tax deductable are: waste disposal, TV licence (if app.) PRTB (obligitary), repairs, replacements etc.

With regard to what you do with any surplus is really dependant on your circumstances, but make sure you have enough/have access to pay any tax due (as said earlier - you can carry losses forward).

It may be worth getting an accountant to do your first returns (not due til 2009 ASAIK) - it's not very complicated, but worth having a foundation to work off.
 
Not too sure about what Slim said about the portion of the expenses that are deductible.

As far as I know, expenses incurred before the first letting of a property are not allowed as a deduction from your rental profit ... although expenses between tenancies are allowed
 
thanks a million for the feedback.

I will answer each of the points in turn:

NHG - we are going interest only as per advice I got and also reading on this site it seemed the way to go, because as Brendan stated there may be better ways to spend that money than to just put it off the rental mortgage, that's why I posted just to see what people's thoughts were

Slim - I think I will probably seek the services of an accountant but I've heard a few horror stories of people not finding the right guy and then paying more than they should in tax. I just wanted to get some info here so I'd know the basics anyway. Also the house came up for letting at the end of August and was only idle for a week before letting it out at the start of Sept, so not much to be gained there. And we don't as yet have a pension so it's something I'm looking into at the moment. The house is going to be our pension and any other's we buy, if you know what I mean

Thomas 22 - We bought the duplex apartment as our PPR a 4 years ago and did not need to sell it to raise the deposit for our new PPR and as the mortgage was so low it made sense to rent. We are getting 1200 because that's the market rate for a 2 bedroomed apartment in the area, in fact given current rental increases we would possibly get 1300. But the tenants are good, keep the place well (so far anyway) and we never hear from them. I wouldn't risk loosing them for the sake of a 100 eur. The apartment was bought for 210000 less 10% plus whatever we'd paid off it at the time of letting. Hence our mortgage being so low on interest only. And yes it's an Irish property.

Sam H - you are spot on, eys we're renting property one and living in property two. So by putting extra of our PPR mortgage can we also off-set the interest on this against Rental Income (sorry if I mis-read) I thought it was only the interest portion of the rental property that we could off-set against? How come a return is not due until 2009? I would have thought it would have been due at the end of this year at the very latest?

As mentioned we haven't spent a penny of this apart from paying 2007 management fees, but I think I'm not entitled to put all of this against the rental income received in 2007 (1200*4). But other than that I think we are alright given the other bits and bobs you can off-set against the rental income

Anymore hints and tips or opinions would be appreciated on this.
 
McGrath said:
Not too sure about what Slim said about the portion of the expenses that are deductible.

As far as I know, expenses incurred before the first letting of a property are not allowed as a deduction from your rental profit ... although expenses between tenancies are allowed
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All the fitout costs incurred before the first letting are allowed ie: furniture,white goods ect:
but before you start to use the money that is building up remember you can only offset the interest so the balance of 480 depending on what other expenses that are deductible might be taxed at 40%. You should be ok in the first year with the fitout costs but down the line you will pay tax so make sure you keep some of it.
I'm not one for pensions as you cant get at it until you retire so the tax relief on this is of no interest to me. Dont get me wrong but you have started your own pension with the property and I would let the money build up for your next deposit and so on.
I always said that I was never going to work after 50 but due to an unforeseen illness I have not worked since I was 40 four years, thats what I did and I now have several properties so good luck.
 
interesting because I didn't think that expenses incurred before the first letting were allowed

From the revenue website:

"What expenses cannot be claimed for?
Pre-letting expenses, i.e. expenses incurred prior to the date on which the premises was first let apart from auctioneer's letting fees, advertising fees and legal expenses incurred on first lettings. "

The more I read up on this the more confused I'm getting.

I haven't spent any of the money as I know there will be some portion of tax to be paid on the excess.
 
As stated It may be worth getting an accountant to do your first returns, I could be wrong but as i said i have several and I have always put in the fitout costs and my accountant has never pull me up on it. Its not that expensive and again this cost is deductible and it looks better when he sends in the return.
 
The first fit out goods and furniture are NOT tax deductible. Get professional advice. Repairs and replacement goods are as far as I know tax deductible.
 
OP - if you renovated before the first letting then that's not allowed. In your case this didn't happen. You can write off the furniture & fittings for 8 years at 12.5% per year - not the whole cost in Year 1. The management fees for the time prior to the letting would not be allowed. You should call revenue to clarify that or else get an accountant to do it for you. I imagine the people you refer to who had trouble with paying 'too much tax' was not down to their accountant but due to their not understanding what is or is not allowable against tax.
Another thing you have not mentioned is stamp duty clawback. Not sure it it applies to you but by searching through AAM you will find information on this. The rules were changed in the last budget but I cannot remember the dates/rules.
 
Bronte said:
Another thing you have not mentioned is stamp duty clawback. Not sure it it applies to you but by searching through AAM you will find information on this. The rules were changed in the last budget but I cannot remember the dates/rules.
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Well spotted. The OP started renting the property before the 5th December 2007, so the old stamp duty clawback rules would apply. They should have paid the clawback at that stage because they had it as their PPR for less than the 5 years required for the excemption. The OP really needs to get professional advice on this as it looks like they are in arrears with Revenue.
 
So by putting extra of our PPR mortgage can we also off-set the interest on this against Rental Income (sorry if I mis-read) I thought it was only the interest portion of the rental property that we could off-set against?
Click to expand...

You misunderstood - the interest part of the rental is an expense, any excess can be use for your PPR and is it not so tax efficient. Once the PPR is paid off, you can focus on the rental property.

Fitout is not an expense - it is a capital allowance. Say you bought the apartment 2 years before & spend €8000 on fitout...the first 2 years are history - but you can write the remaining €6000 off at a rate of €1000 per year after expenses.

About your first return not til 2009 - i THINK this is correct but I would advise you to check - also with the questions about stamp duty & the fact you seem reluctant to check revenue.ie, I would re-issue my advise to get professional advise at least in year 1, or you could end up with a very messy situation - shouldn't cost more that about €350/400....and it is deductable as an expense!
 
thanks all, I've been talking to the revenue today and my first return is due in October 2008 for the previous year (or partial year of 2007).

Also we are not in arrears with the revenue, we knew there was a clawback on stamp at this time of renting

it was the day to day running costs and expenses etc that I was concerned about, not that I'd be paying too much tax but more that I want to know what I don't have to pay tax on as opposed to dodging any payments

I have trouble deciding to round 76.54 up to 77eur on my med1 form, so as I said I'm not looking to evade anything I just want to make sure I'm deducting all allowable expenditure. Why hand over money you don't need to?

Thanks again !
 
sam h said:
Fitout is not an expense - it is a capital allowance. Say you bought the apartment 2 years before & spend €8000 on fitout...the first 2 years are history - but you can write the remaining €6000 off at a rate of €1000 per year after expenses.
Click to expand...

The revenue bible to rental income is here:
[broken link removed]
 
Does the "Rent a Room Relief" of €7620 apply only if you are living in the residence and its your principle residence.?
 
npgallag said:
Does the "Rent a Room Relief" of €7620 apply only if you are living in the residence and its your principle residence.?
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Not really relevant to the current thread....

Lots of previous threads about the "Rent a Room Scheme" and the requirements for eligibility (e.g. if you move abroad, if you're seconded abroad/within the state for work etc.) on AAM if you do a search.

In general, the answer is yes. But if you've unusal circumstances be sure to check out your specific case.
 
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