Seven options to ease the tax burden chasing smaller landlords out of the market

Landlords are back in fashion, it seems. Or smaller ones, at least.

After being castigated in the years following the financial crisis and the near collapse of the Irish property market, there are now fears that a widespread departure of the small-time landlord is adding to challenges in the residential rental market. So much so that the Government is now talking about introducing tax incentives for the sector. Last month, Minister for Housing Darragh O’Brien said that such measures may be needed to keep landlords in the market. But what might that entail?

Taxing times

After steadily cutting back on tax incentives for landlords — Section 23, which was introduced in 1988, was discontinued at the end of 2016 for example — Government strategy is having a bit of an about turn. In addition to the Minister’s comments, it is understood that the Department of Finance is due to review a series of options on the tax and fiscal treatment of landlords over the summer. It previously considered this in 2017, but no significant changes followed. This time, however, there seems to be a greater commitment to bring about some change. One proposal being mooted is that landlords could avail of a lower tax bill in return for charging cheaper rents.

The change in tone is as a result of a much-publicised move away from the rental market by smaller landlords. Last year, research by Sherry FitzGerald estate agents found that the departure of smaller landlords had led to a decline in the number of available tenancies of nearly 22,000 in 2016-2020. At a time when housing provision is a challenge, losing so many rental properties (albeit they still remain in the housing supply, being bought by owner occupiers) is starting to look unfortunate.

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The smaller landlord is after all an important component of the existing rental stock. Figures from the Residential Tenancies Board (RTB) from last year, for example, show that 70 per cent of Irish landlords own just one rental property, with 90 per cent owning three or fewer.

“We feel that there needs to be some incentive to keep smaller landlords in the market,” says Crona Clohisey, tax and public policy lead with Chartered Accountants Ireland, adding that “a lot of landlords are probably choosing not to rent out properties because of costs”.

In a recent RTB survey, one in four of the landlords who said they were likely to sell their rental properties in the short term added it was because taxation on their rental income was too high. Smaller landlords also argue that institutional landlords are treated much more favourably when it comes to taxation. Such investment funds do not pay tax on rental income or gains, although tax does apply to distributions from a fund. Contrast this with the smaller investor who can pay tax at up to 52 per cent on net rental income.

“From the smaller landlord perspective, some things really aren’t fair,” says Clohisey.

No wonder then that in a recent report from the Irish Property Owners Association (IPOA), 90 per cent of respondents said it was unfair that private equity funds pay no tax on rental income.

“It’s very hard to understand the philosophy behind the taxation of landlords. It’s like they’ve committed some big sin,” says Brendan Allen, a chartered tax adviser and spokesman for the IPOA.

“It’s not considered as a business, and this concept is behind a lot of the thinking and taxation burden being put on landlords,” says Allen, noting that, when it comes to improving energy efficiency for example, “you can get tax write-offs for other businesses”, but not on rental properties, while you also can’t avail of retirement or entrepreneurial relief when you sell your property.

Tax measures alone may not be enough to stem the tide of landlords selling up, but they might help. “From our perspective, tax measures alone won’t solve the crisis,” says Clohisey, “There is no magic bullet to any of this.”

So what might be done to level the playing field and offer greater incentives for smaller landlords to stay in the market renting their properties?

1: Make property tax deductible

It has long been a bugbear of landlords that the local property tax (LPT) cannot be deducted against their annual tax bill, despite the view of many that it is a legitimate expense involved in supplying a rental property to the market.

“Depending on where the property is, it can be quite a whack of money. It seems to be unfair,” says Allen.

Revenue estimated in 2019 that allowing LPT be offset against a tax bill would cost the exchequer €20 million in a full year. However, the difference it would make to landlords on an annual basis may be immaterial; in the Working Group on the Tax and Fiscal Treatment of Landlords report from 2017, it was estimated that a landlord with a LPT charge of €90 a year would save just €44 a year if the tax was deductible.

2: Cut tax rates

At present, landlords pay a “staggering” top rate of tax, according to Clohisey, up to 52 per cent on rental income profits. This compares with a rate of 25 per cent for corporates who let out a property.

“We think it could go as low as that,” she says of the 25 per cent rate. Such a rate would significantly reduce tax costs for landlords, and enhance the investment proposition. Some argue it should go lower. While Allen isn’t in favour of tinkering with tax rates, Margaret McCormick of the IPOA has previously said that a flat tax rate of 12-15 per cent should be introduced and applied across the board to both institutional and private landlords.

3: Allow more deductible expenses

As Clohisey notes, in a normal business, you can deduct expenses incurred wholly and exclusively in carrying out your trade, against tax on income or profits. This is not the case for landlords.

“For rental income, it’s all set out in legislation. It’s totally prescriptive which means that if it [an expense] doesn’t fall within what’s set out, you don’t get a deduction.”

Legitimate expenses, such as pre-letting costs for example, can’t be included in a tax calculation. Allen adds that the legislation also means that if you go to a training course on how to be a landlord, for example, the cost of this course would not be deemed to be an allowable expense.

4: Give an incentive for energy upgrades

While landlords were able to avail of the Home Renovation Incentive tax credit some years ago, and can now access SEAI grants for improving the energy efficiency of their rental homes, there is no specific tax incentive for energy upgrades for landlords.

“There isn’t a massive amount of tax incentive to retrofit homes,” says Clohisey, noting that if a landlord incurs a bill of €10,000 for example on upgrading their property, they have to spread it out over eight years. A better approach then, as noted in the IPOA report, would be for building energy improvements to be allowable as a double expense and offset fully in the year they are carried out.

5: Make pension income reckonable

At present, rental income is not treated as reckonable income for pension purposes. This means that landlords can’t avail of tax relief to boost their pension contributions, as someone earning income through other means might be able to do.

“The irony is that an Airbnb business is not treated as rental income; it’s treated as trading income,” says Allen, so pension contributions can be made based on this income.

6: Offset losses

Another issue is the offsetting of losses from one business to cut taxes on profits or income earned from another. If you lose money as a landlord for example, you can’t offset those losses against other income you may have.

“If you make a loss on sweet shop, you can offset those losses on other income, but you can’t offset rental losses,” says Allen.

The same is true for couples, one of whom may have a business or rental property making a profit, and the other a rental property making a loss, but the losses can’t be offset against the profits.

7: Bring back Section 23 (maybe)

Section 23 was first introduced in 1988, and was subsequently extended and amended on a number of occasions before being finally abolished. It looked to incentivise the construction of homes in particular areas around the State by allowing landlords reduce their overall rental income tax bill. For Allen, bringing back such an approach would be “a very useful device”.

“It would be really useful if it came in again, as it could target certain areas where we want houses to be built.”

However not everyone is so supportive. According to Clohisey, property incentives “actually contributed to the property crash”, noting that the availability of cheap finance combined with generous tax reliefs meant that people who never would have entered the rental market as landlords came into it and subsequently got into financial difficulties.

“We would definitely not support the reintroduction of such targeted schemes,” she says.