Investment & Profit Guide

Have you correctly calculated your likely rental profit (or loss)? It's crucial to understand the complete financial picture before committing to a property investment.

A common misconception is that you do not need to declare rental income if the property is loss-making, rented through government programs, or if you live abroad. This is not the case. If you earn even a single cent of rental income in the course of a year, you are required to file a tax return.

Key Considerations:

• Are you aware of the differing treatment for pre and post letting expenses?
• Do you know which expenses can be written off immediately versus those amortized over 8 years?
• Have you factored in all allowable deductions to maximize your rental profit?

Many profitable property investments have had to be sold because the repayment schedule is too onerous for the investor. It's essential to understand not just the profitability but also the cashflow implications of your investment.

Even if a property will be profitable over the long term, negative cashflow in the short term can create financial stress that may force a premature sale, potentially at a loss.

Important Cashflow Factors:

• Monthly mortgage payments versus rental income
• Maintenance and repair reserves
• Property management fees
• Seasonal vacancy rates
• Insurance and property tax payments
• Tax payment schedules

Tax bills are an important component of a cashflow analysis. In particular, at the start of an investment, you may have to pay preliminary tax, which can create additional cashflow pressure.

The deadline for tax returns is typically the 31st October of the following year. This may be extended a few weeks where both tax return filing and payments are made online. Any late filings of tax returns or payments of liabilities will be subject to late filing fees and penalty interest.

Resident vs. Non-Resident Landlords:

Your tax obligations differ significantly depending on whether you're a resident or non-resident landlord. Non-resident landlords face several unique considerations:

• No Joint Assessment for Couples (separate tax returns required)
• Since July 2023, Non-Resident Landlords must deduct 20% from the gross rent to comply with Non-Resident Landlord Withholding Tax system OR have a Chargeable Collection Agent in place
• Different tax return requirements
• Differences in what tax credits can be claimed
• Non-resident landlords are not charged PRSI

Most developed countries have double taxation agreements with each other. If you are a non-resident landlord and need to declare your rental income in your country of residence, these agreements mean you will receive some credit for the income tax paid, preventing you from being taxed twice on the same income.

Your liability for tax can be significantly affected by whether you are resident, ordinarily resident, and whether you are domiciled in the country or not.

Residency Status:

You are typically considered resident for tax purposes if you are in the country for a total of:

• 183 days or more in a tax year, or
• 280 days or more in a tax year plus the previous tax year taken together, with a minimum of 30 days in each year

Ordinary Residence:

If you have been tax resident for three consecutive tax years, you become ordinarily resident from the beginning of the fourth tax year. You will cease to be ordinarily resident at the end of the third consecutive tax year in which you are not resident.

Domicile:

Domicile is generally the country that you consider to be your permanent home. You acquire a domicile of origin at birth, usually the same as the domicile of your father. You can change your domicile after the age of 18, but this requires showing that you have moved to another country permanently or indefinitely.

Your tax obligations vary significantly based on your residency and domicile status:

Resident and Domiciled:

If you are resident and domiciled, you are chargeable to tax on your worldwide income, regardless of whether it's remitted to the country or not.

Non-Resident but Ordinarily Resident and Domiciled:

You will pay tax on your worldwide income except for income from a trade, profession or employment performed outside the country, and foreign investment income if it's less than a certain threshold.

Non-Resident, Non-Ordinarily Resident but Domiciled:

You will pay tax only on your local income and income from a trade, profession or employment performed locally, plus any gains you make locally.

Non-Resident, Non-Ordinarily Resident and Not Domiciled:

You will pay tax only on your local income and income from a trade, profession or employment performed locally, plus any gains on specified local assets only (land, buildings, minerals, and assets of a trade carried on locally).

If you sell a property, you will typically be subject to Capital Gains Tax (CGT) on any profit made. It's important to consider the CGT implications before making any investment decisions, particularly if the property you are proposing to rent was previously your Principal Private Residence (home).

When calculating potential capital gains, consider:

• The purchase price plus eligible acquisition costs
• Enhancement expenditure (improvements that add value)
• Selling costs (legal fees, agent commissions)
• Any available exemptions or reliefs
• The applicable CGT rate at the time of sale

Planning for potential capital gains tax liabilities should be part of your long-term investment strategy, as it will affect your overall return on investment.