My niece was forced to emigrate during the crash. Her apartment, in a rent restriction zone, was rented out for 10 years. Returning home last year, she reoccupied her apartment for one calendar year before moving out again.
As the apartment was only off the market for one year, and then re-registered, the Government forced a loss of approximately €620 a month on the new rent, equal to an annual loss of €7,440.
The increase in interest rates, has also resulted in an increase in the mortgage, – such that my niece now is required to supplement the monthly rent to avoid default.
My question is this: is there any precedent, where the Government forced a business, to sell its goods or service, below the market rate? And if so, does the Revenue Commissioners accept this loss as an offset against current or future income.
If the farmers, for example, were forced to sell their milk below the cost of production, what would be the opinion of the tax man.
Mr P.B.
Your niece is in a rent pressure zone and this is becoming an increasing issue for landlords, not least as the current maximum annual increase in rent permitted is just 2 per cent or the rate of inflation, whichever is the lower. With inflation a multiple of that 2 per cent, and affecting any services the landlord needs to avail of in maintaining the property or even securing the services of an agent, clearly any yield they are getting on the property is diminishing.
In your niece’s case, you say, the rise in interest rates over the past nine months means she is now having to subvent the rent from her other income just to meet the mortgage payments. It may or may not be financially sustainable for her but it is clearly not ideal and is a factor in the recent exodus of small scale landlords – people like your niece – from the market.
From what you say, she had never intended becoming a landlord in the first place but was forced to leave the State in the aftermath of the crash that ended the Celtic Tiger years. That wasn’t unusual at the time, not least as many homeowners back the were in negative equity. But most of those homes, especially ones in what became rent pressure zones are like to have recovered their value since and many of those owners have since sold out, either because they are not coming home, because they had growing families and needed to liquidate to buy a bigger family home or because they weren’t much interested in being a landlord and in owning a second property.
Rent pressure zones have been in place since 2016 so it is something your niece will have been familiar with over the past six years or so. She will no doubt be very familiar with the limited exemptions – including crucially that a property can only be considered a new rental if it has been off the market for a minimum period of two years, or there has been major work carried out on the property to expand its footprint or dramatically alter its layout or energy efficiency.
Having been in the apartment for just the one year before renting it out again, she must have known that she would be bound by the rent pressure zone rules. And I’m presuming she did the sums and figured out that she would be better off renting now even at a rent that is €620 a month below the market rate rather than keeping the property off the market for the full two years and then being able to set a full market rent.
Alternatively, of course, her finances may be so tight that she simply could not afford to leave the apartment lying vacant while she had a mortgage to pay and accommodation costs to meet wherever she is now living.
You ask whether there is any precedent for Government forcing a business to sell goods or services below a market rate. The truth is that a whole range of goods and services are restricted in pricing rather than being left to find their own “market rate”.
Taxis are limited by regulation in what they can charge for their services rather than the surge pricing option available in other markets for rideshare operators like Uber. They cannot simply raise their prices at times of higher demand when they could no double command a higher fee for their services.
The same goes for the airport authorities, which are strictly regulated in what they can charge airlines (and subsequently passengers, obviously) for the services they provide and the investment they need to make to improve those facilities. Private businesses like pharmacists too are limited both in relation to medical card holders and to the wider private market on the Drug Payments Scheme in what they can charge for prescription medicines.
And, of course, rent controls are a common feature of private rental markets in many countries.
That brings us to the more interesting part of the question: whether the Revenue Commissioners accept any shortfall against market rates against current or future income?
And the answer here is no, they don’t. They key issue here is that Revenue Commissioners treat institutional landlords differently than private landlords like your niece. In your niece’s case, this is simply treated as income in the same way as her workplace earnings and any other income, and not as a business venture. The institutional landlords are treated as businesses and are allowed offset costs and losses against income and profit.
The same is true of capital gains tax rules: if your niece decides to sell this apartment and secures a higher prices than she paid for it as you would expect, she will be assessed for capital gains tax on that part of her ownership during which the property was rented out, not on whether she was able to secure a market rent on it for that time.
I should say here that institutional landlords are also bound by the rules of rent pressure zones. And the offsets they would be allowed relate to actual losses and permitted expenses. They are not allowed claim the difference between the market rent for the property they own and the actual rent they can receive under rent pressure zone rules.
The same rules apply to the farmers to who you refer.
They, too, will be treated like businesses. And if they are receiving prices below the cost of productions, they can claim these as losses.
Farmers do, on occasion, claim that the prices they are getting for their goods do not meet the costs of production. Where that situation persists, understandably, they get out of that sector. That happened recently with egg producers in the UK, with farmers here threatening similar action.
You can also see it in the current shortage of items like tomatoes and peppers on supermarket shelves. The Irish farmers who would normally augment supplies from warmer parts of Europe decided they could not afford to heat their greenhouses this year given the current high price of energy.
The end result is that the good or service is not provided. It is, of course, open to your niece to choose not to rent her apartment at a rent that is below its market value. But as she has fixed costs attached to it – most particularly her mortgage – and no chance to offset any costs against other taxable income, it’s not quite the same thing.
The National Economic and Social Council, which advises Government on economic strategy, has recently published a report on the private rented sector which raises the issue of tax incentives to encourage people like your niece to continue renting her property in the middle of what remains a housing crisis, potentially linked to longer-term secure tenancies. But the report does also raises some of the problems associated with any such incentives.
The current signals from Government in the wake of data showing a large number of private landlords like your niece are exiting the business and selling their properties – with obvious knock-on effects on the availability of property to rent for people who either cannot afford to buy at the moment or choose not to do so – is that they are seriously considering such incentives but it is likely to be budget-time this autumn before we hear what those might be.
Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street Dublin 2, or by email to dominic.coyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice
