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Tax Implications of Renting a Property Overseas

Article written by Diarmaid Condon in 2008

As the majority of Irish overseas purchasers wish to let their properties at some stage, the Revenue’s treatment of foreign rental income is of great interest to many buyers.

Income tax is payable on the net profit realised on rental income arising from foreign properties, i.e. the profit after all allowable deductions have been removed. The tax is payable under Self Assessment within what the Revenue refers to as the Pay and File system. This system obliges every Irish tax resident to pay the Preliminary Tax owed for the current tax year, submit your Tax Return and pay the balance of tax due for the previous tax year. For a PAYE worker tax due from external sources can be paid by means of a reduction in tax credits with certain income limitations.

Rental income is generally calculated on the full amount receivable regardless of whether it is ever brought into Ireland or not. The tax payable is calculated in the same way as taxable rental income from an Irish property with the same deductions and allowances being available (a full list is available on the Revenue’s IT 70 leaflet available on its website). Deductions are also normally available where tax has been paid on the rental income in the country in which the property is situated except if you are being taxed on the remittance basis.

If the allowable expenses and deductions exceed the rents receivable you can deduct any rental loss from rental income received on other foreign properties. The unused loss can be carried forward and set against any profits from any foreign property in subsequent years.  You cannot, however, deduct expenses that are not allowed under Irish tax law, even if they are deductible in the country in which the property is situated, e.g. depreciation of the value of the building. An Irish rental loss cannot be set against foreign rental income, it may only be set against Irish rental income.

Allowed expenses include property management, insurance, repairs, local authority rates, interest on borrowings to purchase the property and the cost of fit out and furnishings. Expenses not allowed include pre-letting expenses (other than letting and legal fees incurred in connection with the first letting), post-letting expenses, capital expenditure or the cost of your own labour if you carry out repairs to the property.

The Revenue only recognises expenses incurred during the term of a lease so when the property is first acquired, before it is let and occupied by a tenant, interest payments on the borrowings used to purchase the property are not allowed. Expenses, including interest payments, incurred in the period between lettings are deductible provided you do not occupy the property at that time and you re-let it at a later stage.

Another important consideration is the inclusion of the cost of travelling to your property. These costs are only allowable if the journey is undertaken ‘wholly and exclusively for the purposes of earning rental income from the property’. The Revenue says; “There can be no element of private purpose whatsoever.” If you use the opportunity to take a break or a holiday, or to look at acquiring another property, then no part of the travel cost can be allowed. In other words, if you intend to claim a lot of travel expenses against your rental income you can expect to have your records fairly rigorously probed by the tax authorities.

Interest on borrowed money that is used to purchase, improve or repair a rental property can be claimed as a deduction against the rental income from that property. You must specify your intentions when borrowing the money and purchase of property through a company is not supported. There is no limit on the amount of interest relief available but if you stay in the property or allow others to stay there rent free, you will have to apportion the interest.  Interest relief applies both on interest only loans and standard types where you repay capital and interest, but you can only deduct interest paid during the period in which the property is let. 

If you incur outgoings on furnishing and fit out you are entitled to wear and tear allowances. The fixtures and furniture must belong to you and be in use at the end of each year for which allowances are claimed. These allowances are given over several years rather than being fully deductible in the year the cost is incurred. The allowance is 12.5% of the allowable cost per year over eight years. The allowances are not available while the property is used for private purposes.

The main types of tax paid abroad are property ownership tax, service charges (rates) or income tax. We’ll deal with CGT in the section on ‘Tax Implications of Selling an Overseas Property’. Ownership tax cannot be claimed as a credit or deduction against your Irish tax liability as there is no similar tax here. Service charges are an allowable expense and income tax liability depends on whether the country in question has a double taxation agreement with Ireland or not. There is a list of countries with double taxation agreements plus a detailed breakdown of what is covered in them on the Revenue’s website. If there is an agreement it is normal for the tax to be paid in the foreign country and a credit for some, if not all, of the tax paid granted in Ireland. If the tax threshold is higher in Ireland then the balance due is payable, so you will pay a minimum of your Irish tax liability in all cases. If your foreign income tax liability on your foreign rental income is higher than your Irish tax liability, you are not entitled to a refund from the Irish Revenue. There are sample calculations on the Revenue website if you are unclear on this issue.  

Some countries, such as Spain, charge a tax on ‘deemed’ rental income – this means you are assumed to have rented the property even if you have not done so. This tax cannot be taken into account in calculating your final Irish tax liability as there is no equivalent charge in Ireland.

Where there is no DTA you will be charged income tax on the foreign rental income less allowable expenses and foreign tax paid. Again, examples are available on the Revenue’s website. If you own a property in a country which carges no income tax (e.g. the UAE) then you are liable for full Irish income tax at your marginal rate on any rental income derived, less allowable expenses.

If you are a self-employed taxpayer you are liable to pay PRSI on foreign rental income. If you are a PAYE taxpayer or aged over the retirement age of 66, you do not have this liability. You may also be liable for a health contribution up to the the age of 70. You should consult with your tax advisor on such issues.

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Further Information:

For a selection of property from around the world click here. 

For a listing of agents selling overseas property click here.

For independent articles on overseas property click here.

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You may also enjoy a visit to the OverseasCafe.com's topical blog at http://overseascafe.blogspot.com.

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