There is an interesting situation that we are seeing much more of lately, where people in negative equity or negligible equity are deciding that because they cannot now move up the ladder (which was the point in their initial purchase – as a stepping stone to trading up), they will instead rent out their home and then rent a house in the area they actually want to live.
While this is a working solution to a person in negative equity seeking mobility it can result in a tax liability that many people are not aware of, this is how it occurs, the portion of mortgage payment that goes against the capital is actually taxable, and if it is paid to the bank it doesn’t mean you don’t have to pay tax on it.
The finance act in 2009 brought about a change whereby only 75% of mortgage interest can be offset against Case 5 rental income as an expense, and this further exacerbates the situation even for those who have interest only loans!
However, we’ll demonstrate the position a person would find themselves in if they had a mortgage of €260,000 over 25yrs (costing €1,230 per month) and they rented the property out for c. €1,100.
Clients have told us they have gone ahead and done this, but that they don’t mind losing out on the €130 per month in order to live where they really want to be, that is when we have to explain the rest of the implication to them!
For a start, if you rent out your property within the first five years (if you didn’t pay stamp claiming First Time Buyer status) there can be a stamp duty clawback, but it doesn’t end there.
Within the €1,230 per month mortgage payment (TRS will no longer apply if you are renting the property out) there are two parts, €650 is interest and the remaining €580 is capital repayment. Only 75% of the €650 can be set off against the rent meaning that only €488 applies.
So your €1,100 rent minus €488 is the ‘profit’ you are deemed to have made which amounts to €612 per month and at c. 45%(ish) tax that means you’d have to pay Revenue €274 per month in tax on top of the €130 difference that it takes to make up the full payment.
This means that the monthly cost is actually around €400 (and this is made up of after tax income – so the gross cost is higher again- of course, we can advise people so that this doesn’t happen but often people don’t seek advice in advance and that means that even with our help they are facing a tax liability, for that reason we would hope that if you are considering this that you call first!
Other expenses that have to be considered are changing your home insurance to reflect that it isn’t a primary home any more, then there is the NPPR tax (non-principle private residence), as well as PRTB requirements.
If you have any questions call us, the main thing is to ensure that you don’t find yourself in this situation if you can’t sell your current home and want to move elsewhere!