The current housing crisis has put first-time buyers under pressure to pay back mortgages on over-inflated properties. This has been further exacerbated by rapidly rising mortgage interest rates.
The Rent-a-Room relief is often used to help ease the pain of large monthly repayments. It is one of the most favourable tax reliefs available to Irish residents.
In this blog post, we will explain what Rent-a-Room Relief is, what you need to do to qualify, as well as the pros and cons.
What is Rent-a-Room Relief?
Rent-a-Room Relief allows a home owner to earn income that is completely tax-exempt by letting out rooms in their home. The annual exemption limit is €14,000. If this limit is exceeded by even €1 then the total amount of income is taxable.
This income must be declared annually via a Form 11 return with Revenue.
This relief is not just available to homeowners, it is also possible for tenants to sublet rooms in their lettings in certain circumstances if allowed by your landlord.
What Are The Requirements To Apply For Rent-a-Room Relief?
The following are the key criteria you will need to qualify for the Rent-a-Room Relief:
- The gross amount of rental income earned must be below €14,000.
- Relief cannot be claimed for rental income from a child, civil partner, employer or short-term guest.
- The property must be your main residence (PPR).
- The rental unit must be attached to the house, self contained units (e.g basement) within the house also qualify.
- You cannot claim relief on rooms that are used for business purposes.
- The minimum continuous letting period must be at least be 28 consecutive days. There are certain exceptions to this rule for 4 days a week digs, student lettings and respite care for incapacitated individuals.
- The tax rate works out to be 0% under the Rent-a-Room Scheme, compared to letting out the whole house, which could attract tax at a rate as high as 52% depending on your level on income from other sources.
- Rent-a-Room relief will not affect Mortgage Interest Relief or Owner Occupier Relief.
- You do not have to register with the PRTB.
- There is no requirement for a contract to be drawn up between you and the tenant, although there may be benefits of drawing up a simple contract to lay down ground rules and prescribe for dispute resolution.
- Student lettings permitted.
- Renting out a room has no effect on the Principle Principal Private Residence (PPR) if the house is subsequently sold.
- As there are no formal legal agreements with tenants, a dispute may be very difficult to resolve. Ground rules should however be set and agreed upon prior to renting out the room.
- An annual income tax return will need to be completed. This may incur additional costs if you outsource this to a professional.
- Inviting a stranger into your personal living situation may not be for everyone.
In summary, depending on your situation the Rent-a-Room scheme may be a way to help pay down your mortgage or even build up a cash pile for buying a second property in a tax-efficient manner.
For example, if you own a 3-bed house and rent out 2 rooms at €500 a month each, this would net you €12k a year under this scheme.
If we then compare this to someone who decided to buy a second property to let out. If they let out the whole property for €1,500 p/m (after expenses) this would amount to €18k per year. When they then deduct the potential tax of 52% they are left with €8,640.
But before you do this make sure you meet all of the requirements to be eligible for the Rent-A-Room relief.
This blog post is for informational and educational purposes only and should no be construed as financial advice.
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