People have many different reasons for renting out a room in their home, but they can all make up to €14k tax-free
There aren’t many legal ways you can avoid paying tax, but there is one where you can earn up to €14,000 every year without having to pay a cent in income tax, USC or PRSI to the Government. I am referring, of course, to the rent a room scheme.
You can rent out a room or rooms in your home, and earn up to €1,166 every month, tax-free. I have come across many different people recently who are availing of this opportunity, and their motivations can be quite different.
I encountered a couple in their mid-60s recently who were living in a four-bedroom house. Their kids had long since flown the coop and they fell into that situation where they were asset rich and cash poor. They were finding it difficult to live off the state pension and make ends meet, so they had two options, as they saw it, to solve their problem.
They could either sell their property and downsize, or they could, in exchange for a lump sum, sell a percentage of their property to a home equity release company. If they chose the latter, the amount would have to be repaid when they died. How that would happen would ultimately fall to their children (most likely scenario would be from the sale of their property). Neither option was appealing to them.
They liked where they lived, had great neighbours and enjoyed their garden so they didn’t want to move and part selling their property would come at a high price (if they lived until they were 85 the interest on the €50,000 they wanted to raise would amount to c. €83,046)
When the rent a room scheme was suggested to them as a possible solution, their initial reaction was, it wouldn’t be for them. But the more they thought about it and spoke with others, they changed their mind and decided to give it a go, and they haven't look back.
They rent out two rooms in their property to two lovely professionals who haven’t been a bother, and they receive €1,200 every month.
The rent a room scheme has doubled the amount of income they receive each month. Their cash flow situation has been solved. Their quality of life has increased dramatically, and they are planning a foreign holiday for early next year, something they couldn't have even contemplated six months ago.
I met a girl earlier this year who told me how she lost her job and without the rent a room scheme, would have gotten into arrears on her mortgage. She believes it possibly saved her from having her house repossessed.
You see, it took her 18 months before she got a new job, and even if her mortgage was structured on an interest-only basis, the repayments would still have been beyond her reach because the amount she borrowed was simply too high. So, she believes she would have been at least 12 months in arrears by the time she was back working. Renting out rooms helped pay her mortgage and keep it up to date.
Another person I know of rented out two rooms in her property, not because she had to, because financially she is absolutely fine. She has a big house, lives close to a university, and her husband travels quite a lot, so she decided to rent a couple of rooms on short term basis (three months) to two foreign students.
The income she got for those three months is hers to keep and do what she wants with - that was her motivation. If you asked her would she do it again, she’d probably say no, not because her tenants weren’t nice, but she did feel her home wasn’t hers for those three months.
If you wish to partake, here are some things to consider. You must be living in the property and it has be your principal private residence. You can have other residences i.e. you may live in another property for part of the week for work purposes, for example, but this property must be the place you call home.
You don’t have to register as a landlord with the Private Residential Tenancies Board but you should have a formal, written agreement in place outlining rent being charged, when it is to be paid, whether a deposit is being held etc. It’s not a legal requirement but good practice to have in the event of a dispute.
If you earn 1 cent above €14,000, you will pay tax on the full amount you receive, and not just on the excess over €14,000.
The relief is available per household and not per individual so if you thought amounts over €14,000 could be apportioned to say a husband and wife, to avoid paying tax, you can't.
Unless the room you rent is attached to your property, it can’t qualify for relief. If a garage, for example is detached from your property but converted to living space, it won’t matter because it’s not attached to your property
You cannot claim relief if you advertise a room on your property for short term stays, like some people do via Airbnb. The distinction Revenue makes in this regard is that in order to qualify for relief, the room has, to be used “either on its own or in conjunction with other parts of the residence, as a home”.
Even though you won’t have to pay tax if you are in receipt of €14,000 or less each year, you still have, to declare this income every year. You must complete a Form 12 income tax return and enter the amount you receive under the exempt income section.
So whatever the reason the opportunity to earn €14,000 every year tax free is certainly worth exploring and knowing more about.
Liam Croke is MD of Harmonics Financial Ltd,
based in Plassey. He can be contacted at firstname.lastname@example.org or www.harmonics.ie