Sample Foreign Rental Income Tax Calculation
Maura, an Irish resident individual, buys a furnished foreign property on 1st January 2015. She spends January decorating and repairing the property. Her parents spend February and March there, rent free. Maura occupies the property for the first half of April; some friends stay there in the second half, rent free. She rents out the property in May, June, August and September, and occupies it herself in July. Various friends and relatives use the property rent free in October and November. Maura's parents return to it in December and intend to stay there for the winter; Maura joins them for Christmas.
The total rent paid to Maura is:
May €2,000 June €2,500 August €3,000 September €2,000 Total €9,500
Maura had the following expenses:
Advertising property for rent before first letting €56 Advertising property for rent after first letting €56 Letting agency fees re rental period €107 Barbecue €320 Car Hire €880 Cost of own labour €2,850 Credit card interest on purchase of barbecue and refrigerator €103 Electricity, gas, fuel €1,815 Flight costs €516 Insurance €354 Loan repayments €15,690 (Interest portion of loan) (€5,436) Language course €250 Local rates/service charge €400 Patio €1,300 Property Management fee €1,200 Refrigerator €350 Decorating and Repairs €1,000 Stamp Duty €320 Wealth tax €256
How much of this is 'allowable expenditure' which can be deducted from rent received in calculating taxable foreign rental income? To work this out, we need to categorise the different types of expenditure as follows:
- Fully allowable
- Time apportioned (partly allowable, but not for the period of personal use)
- Not allowable
- Deductible as a capital allowance, also time apportioned
The following expenses are allowed in full:
- Advertising property for rent before first letting
- Advertising property for rent during rental period
- Agency fees for rental period
Time apportioned expenditure
As indicated, other expenditure is allowable but the deduction is restricted to take account of the period when the owner and/or her relatives and friends occupy the property. In this example Maura and her parents, relatives and friends occupy the property for eight months, so 8/12ths (66.67%) of the following expenditure is disallowed and 4/12ths (33.33%) is allowed:
|Item||Amount of expenditure||Amount allowed|
|Electricity, gas, fuel||€1,815||€605|
|Local rates/service charge||€400||€133|
|Property management fees||€1,200||€400|
1Calculation of allowable interest (€5,436 x 4/12 x 75% = €1,359)
The expenditure not allowed as a deduction for income tax purposes would be:
- Car Hire
- Cost of own labour
- Credit card interest on purchase of barbecue and refrigerator
- Flight costs
- Language course
- The 'capital' element of the loan [only the interest element is allowed]2
- Stamp Duty
- Wealth Tax
- Pre-letting expenditure on decorating and repairs to get the property into a letting condition
2For rental income purposes a deduction is allowed (subject to certain conditions) for interest on borrowed money employed in the purchase, improvement or repair of the premises concerned. However, for interest accruing on or after 7 April 2009, the deduction in the case of residential investment property is restricted to 75% of the interest otherwise allowable. In this example, it is assumed that Maura’s loan was applied solely to the purchase of the premises.
3The patio could be allowed as 'enhancement expenditure' and deducted for capital gains tax purposes if Maura sells the property. Also, while depreciation of the property value is allowed as a tax deductible expenses, in some jurisdictions, it would not be allowed as a deduction under Irish legislation.
Repairs actually incurred during the period of letting may be allowed. In this case a plumber was called to replace a stopcock during the May letting period and charged €150.
In respect of certain other expenditure, capital allowances may be deducted for wear and tear. Maura can deduct up to 1/8th (12.5%) of the cost of certain items per year over eight years.
In Maura’s case, as with other expenditure, the capital allowances will be time apportioned. The property is only rented for four months out of twelve, so Maura can claim 4/12ths of 12.5% (4.167%) in this year. Maura can only claim capital allowances if the item is still in use in the property and the property is still being rented.
|Item||Amount of expenditure||Capital allowance|
Rental Income Calculation
Advertising - pre-letting €56 - between lettings €56 Agency fees in rental period €107 Electricity, gas, fuel €605 Insurance €118 Loan interest €1,359 Local rates/service charge €133 Property management fee €400 Repairs €150 Total €2,984
Barbecue €13 Refrigerator €15 Total €28 Rent received €9,500 Less allowable expenses (€2,984) €6,516 Less capital allowances (€28) Taxable rental income €6,488 *
*This figure does not take account of any double tax relief that may be due if Maura has paid foreign tax on her rental income from the property – see Disposal of foreign property for details.