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.

Rent received

The total rent paid to Maura is:

    May       €2,000 
    June      €2,500 
    August    €3,000 
    September €2,000 
    Total     €9,500

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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

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Fully allowable

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

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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:

A list of expenses that should be time-apportioned
Item Amount of expenditure Amount allowed
Electricity, gas, fuel €1,815 €605
Insurance €354 €118
Local rates/service charge €400 €133
Property management fees €1,200 €400
Loan interest €5,436 €1,3591

1Calculation of allowable interest (€5,436 x 4/12 x 75% = €1,359)

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Not allowable

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
  • Patio3
  • 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.

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Capital allowances

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.

A list of expenses for which time-apportioned capital allowances can be deducted
Item Amount of expenditure Capital allowance
Barbecue €320 €13
Refrigerator €350 €15

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Rental Income Calculation

Allowable expenses

      - 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

Capital allowances

    Barbecue                     €13 
    Refrigerator                 €15
    Total                        €28 
    Rent received             €9,500 
    Less allowable expenses  (€2,984)
    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.

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