Sinead Ryan answers your questions about real estate finance.
Question: My wife and I have a second home, a nest egg. Our last tenant moved out in April and we let our son move into the house rent free. He is paying the utility bills. Is this acceptable to Revenue or will there be problems?
You mentioned in a recent article about renting peppercorns and we wondered if our situation would be covered by charging our son a nominal fee as rent. And if so, would we have to draw up a contract?
Answer: This sounds like a good solution to a joint problem, and of course hosting your child is not a problem in and of itself.
Marian Ryan, Manager of Consumer Taxes at Taxback.com, advises: “In the case of a home rented to a child with free/reduced rent, the difference between the rent charged (if any) and the market rent is considered a taxable donation for capital. acquisitions tax, unless your child is under 18 or under 25 and in third grade.
“The first €3,000 of the total value of all gifts received from anyone in any calendar year are exempt. As your property is jointly owned by you and your wife, your son can benefit from tax-free gifts of €6,000. Therefore, if the annual market income is €6,000 or less, your child will not have to pay taxes.
“If the amount of the purported gift exceeds the €6,000 annual exemption, then the relationship between the person giving the gift and the person receiving the gift is essential in determining the capital acquisition tax liability. The Group A threshold (donations/inheritance from parents to children) currently amounts to €335,000.
“This threshold is a lifetime threshold and any donations or inheritances received within the same group must be added. When the amount of the gift or inheritance exceeds 80% of the group threshold, your child must file a CAT statement called IT38. The tax implications for you could be more complicated.
“If rent is not collected, there will be no more tax obligations. However, if a reduced rent is charged, you will be taxed at your marginal rate (up to 52 percent) on your rental earnings (gross rental income minus allowable expenses). Rental benefits must be reported on your annual tax return(s), which can be Form 12 or Form 11. Individuals whose total non-PAYE net income is less than €5,000 (but non-zero) may file a Form 12 tax return.
“However, if your non-PAYE income exceeds €5,000, you will have to register for self-assessment and submit a self-assessment Model 11 each year. In the case of couples contributing jointly, the threshold of €5,000 is applied to the joint non-PAYE income of both spouses.
“Furthermore, if you are unable to make a profit on the rent received, this will be considered an uneconomic lease. You cannot offset the losses you make from uneconomic rentals with other rental earnings.”
It seems to me that you simply want the property occupied and that you do your son a favor. This is absolutely fine, but expose the details to the light and independently verify them, especially when it comes to valuing lost rent.
Ask: I live and work outside of Ireland. I have a property in Ireland, which is rented out to tenants. The rent is very low, especially by today’s standards. My tenants and I signed a lease agreeing that if either party wanted to terminate the lease, one month’s notice would suffice. Are my tenants legally entitled to more notice if I decide to terminate the lease?
Also, should I pay taxes on my rental income or does that happen only on a certain amount? I don’t earn a salary in Ireland because I work abroad.
Answer: In terms of taxes, I’ve gotten a few inquiries about this from a recent question from a tenant with an absentee landlord. So, to recap, Gerry Scully of Tax Return Plus says that he does, he must pay income tax and the universal social charge on the profits from his Irish rental property.
However, as a non-resident you are exempt from PRSI. Tax is applied using the flat rate tax band at 20pc up to €36,800 and 40pc above. USC is zero up to €13,000 and 0.5-4.5% above. You can take advantage of a portion of the €1,700 personal tax credit (based on the ratio of your Irish income to your worldwide income) and would probably also benefit from a briefing from an accountant or tax adviser familiar with the tax laws where you reside. .
If you do not appoint an Irish collection agent, your tenant is required to deduct 20% withholding tax at source.
Now, in terms of the rental agreement with your tenant, this could be problematic. The Residential Leases Board says that in a fixed-term lease a Notice of Termination may be given for three reasons: (a) a break clause within the lease, (b) both parties agree to terminate the lease, or (c) when the lessee has breached its obligations and was given a reasonable time to remedy the breach.
If your tenant disputes this, they can do so with the RTB, so it may be worth contacting them to verify their position.
