If you rent property to get income, there`s a section in the income tax
return which is aimed at you. This is Part 12 of the return.
If you made a rental profit you`ll probably be on the safe side but if you
made a loss, expect the Receiver of Revenue to fire a series of questions
at you to explain that loss.
Why? Because the loss from the rental business can be used to reduce net
income from other sources when you add everything together (such as
employment income and investment income) - provided you are not using a
company or close corporation (CC).
If you are using a company, the loss
will be trapped in that company or CC`s tax return because it is treated as
a different ``person`` for tax purposes.
Remember that your success will depend on your discussion skills and your
preparation. There is no clear cut answer as long as you can demonstrate
that you did your homework.
Questions you will have to answer include:
* Are you also living in part of the house or flat which you are renting
out? Chances are that you did not buy that place solely for business
reasons but for domestic reasons as well;
* Are the rentals you charge market related? If you rent the house or flat
at rentals lower than those of the market, chances are you deliberately
planned to make a loss and that loss may not be allowed;
* Did you advertise rigorously for tenants? If you did not place
advertisements in the media to obtain tenants, it will be clear that you
were not serious about your business;
* Is there a lease agreement in place? A proper, signed lease agreement
will increase your chances of getting the Receiver of Revenue to allow your
loss;
* Did you perform a feasibility study? Preparing forecasts, showing that
you intend increasing rentals in future and ultimately start making profits
will show that you are serious about a profitable business;
* What was your intention when you bought this property?
* Are you related to the tenant? It will be a little difficult to say that
you were serious about this business if you rent it out to your brother!
* Have you appointed an agent? Although you`ll have to pay the agent,
appointing an agent should convince the Receiver of Revenue that you are
really running a property rental business; and
* What prompted you to buy this property? Here you could say because a new
mall was to be erected and you thought it would attract a lot of tenants or
the property is close to public transport, for instance.
This is not necessarily a complete list of possible questions you may face.
If you genuinely intended to run a property-letting business, you should
have little trouble providing reasons and proof that everything is in order.
If the Receiver of Revenue concludes that you did not have a business
motive when you acquired the property, the loss you made will be carried
over to the next year and not be set off against current income from other
sources.
So once again, it`s important to keep detailed records of events or
transactions that are likely to have tax implications.