We Irish love property as an investment and we all have a fear of missing out when it comes to our money. So if you’re one of those thinking of buying a property and paying off that mortgage as soon as possible, here’s how you might go about it.
If you are considering getting on the property ladder or “rightsizing”, the new term for downsizing your home, consider a property that can avail of significant tax breaks on rental income to help with that mortgage.
All of the rent generated could even be tax free if you avail of a scheme to rent out part of your own residential property.
Homeowners can receive up to €14,000 tax free each year through the “rent a room” tax credit scheme.
Considering a main residence with the potential to avail of this scheme could be far more beneficial than the traditional “buy to let” model, and involves less hassle than managing different properties.
Remember that the €14,000 is completely tax free, i.e. no income tax, USC or PRSI.
Many clients I have met have presumed that the “rent a room” scheme means that you can only have one of your bedrooms, within your main house, let to a student or a long-term lodger.
This is not necessarily the case as you could rent a unit attached to your main house that has its own private entrance.
That means no awkward meetings on the landing in the middle of the night with your tenants.
Here’s an example of a property that was for sale in Galway recently. There was a garage adjoining this particular house, which if converted to a one bed property, could see the owner earn up to €750 per month tax free based on rents in the area.
Refit prices would cost somewhere between €25,000- €35,000, but once up and running could generate a tax-free income of up to €9,000 a year.
So, once the costs of renovation are paid off after roughly 4 years, the homeowner could see their monthly mortgage repayments substantially decrease.
Or alternatively they could keep their monthly repayments level and pay off their mortgage in double time.
Of course, with such a potential for tax free gains the Revenue have imposed restrictions. Following recent legislation short term lets (Airbnb types) cannot avail of the scheme.
You can also be heavily penalized if you earn anything over the €14,000 limit. Even €1 euro more will mean taxing the full rent at your marginal rate of tax!
There are additional restrictions in regard to renting the property to a child/partner/employee etc.
Be conscious that you may have to register your property with the Residential Tenancies Board and the rights and obligations under the Residential Tenancies Act would apply.
RTB rules would apply if you want a tenant to leave and you might also be subject to complaints from your tenant.