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Property Tax Reliefs
Tax relief's are available to a person who has incurred expenditure on the purchase, construction, conversion or refurbishment of a qualifying property and who lets that property, having complied with certain conditions.
The most common relief available is section 23 relief.
This document is intended for guidance only.
Section 23 relief is a commonly used term for rented residential relief. In general, section 23 relief is a tax relief that applies to rented residential property in a tax incentive area. It is available to a person who has incurred expenditure on the purchase, construction, conversion or refurbishment of a qualifying property and who lets that property, having complied with certain conditions.
Relief for expenditure incurred can be set against the rent received from that property and other Irish rental income so that the amount of a person's taxable income is reduced.
If you don't have other Irish rental income at the moment or unlikely to have other Irish rental income in the future there most likely us little benefit from buying a section 23 property. Remember you can't use the relief against any other income.
The term ‘property' as used in this guide refers to rented dwellings such as houses or apartments. It should be noted that it is the first use of the property following construction, conversion or refurbishment that determines the type of relief that will apply. If the property is first used by an individual as his or her sole or main residence, owner-occupier relief applies. If the property is first let by an individual under a qualifying lease, section 23 type relief applies.
It is not possible for both types of relief to apply to the same property at different times. To qualify for relief the following conditions must be satisfied;
•Expenditure must be incurred on the construction, conversion or refurbishment of a property under the terms of a tax incentive scheme within the qualifying period. It is not sufficient to merely own a property in a designated area
•In the case of the integrated area urban renewal, town renewal and the living over the shop schemes, the property must have been certified by the relevant local authority as meeting the objectives of the plan for the particular scheme in question
•The property must be situated wholly within a designated area, front onto a qualifying street (living over the shop scheme) be within an 8km distance of a certifying educational institution (student accommodation scheme) or be situated within the site of a park and ride facility. As each individual dwelling must be situated wholly within a designated area there is no relief available for dwellings situated partly inside and partly outside a designated area. Therefore, a single apartment block that straddles a designated/non-designated area will contain both qualifying and non-qualifying apartments; there is no provision for apportioning the qualifying expenditure over the non-qualifying apartments
•The property must be suitable for use as a dwelling and be used only as a dwelling. For example, if part of a house owned by a doctor is used as a surgery or office no relief is due. Land such as a yard, garden or car parking space that forms part of the property also qualifies for relief
•Where qualifying expenditure is being incurred up to the 31 July 2006 extended deadline, a full and valid planning application covering the work represented by that expenditure must have been submitted to the relevant local authority by 31 December 2004
•Where qualifying expenditure is being incurred up to the 31 July 2006 extended deadline, and where the construction, refurbishment or conversion does not require the submission of a planning application, work to the value of 5% of the development costs must have been carried out by 31 December 2004 and a detailed plan in relation to the development work and a binding written contract under which the expenditure is to be incurred must have been in place
by that date
•Where qualifying expenditure is being incurred up to the 31 July 2006 extended deadline under the integrated area urban renewal scheme, a certificate must have been issued by the relevant local authority stating that 15% of the total project cost had been incurred by 30 June 2003. This certificate must be
issued on or before 30 September 2003
•After its purchase, construction, conversion or refurbishment, the first use of the property must be its letting under a qualifying lease, and it must continue to be so let for a period of 10 years from the date of the first qualifying lease. Reasonable periods of temporary disuse between the ending of one qualifying
lease and the commencement of another such lease are acceptable. A qualifying lease is a lease drawn up at arm's length under which rent is received. Any premium payable cannot exceed 10% of the combined site and construction costs of the property in the case of a property that is constructed. In the case of refurbishment and conversion projects, the premium cannot exceed 10% of the market value of the property at the time that the refurbishment or conversion
work was completed. The lease cannot allow the lessee, or any other person, to acquire an interest in the property for less than the market value of the property. There are additional requirements for qualifying leases of properties that are let under the student accommodation scheme. The Department of Education and
Science Guidelines should be consulted for these additional requirements
•In the case of the rural renewal scheme, the duration of a qualifying lease cannot be for a period of less than 3 months. For the period 1 June 1998 to 5 April 1999 the minimum period of a qualifying lease was 12 months. Holiday lettings are not allowed as the property must be used as the sole or main residence of the lessee
•In the case of the seaside resorts scheme, a property must be used primarily for letting to tourists and be occupied for no other purpose from April to October each year. Lettings to non-tourists are permitted in the remaining months but a
property cannot be let to, or occupied by any person for more than two
consecutive months at any one time or for more than six months in any year. A register of lessees must be maintained
•The property has to meet certain floor area specifications
•A certificate of reasonable cost or a certificate of compliance must have been issued in respect of the property (see Appendix 4 for details)
•Where it is required, planning permission must have been granted for refurbishment and conversion work.
Guidelines outlining the conditions applying to the student accommodation scheme have been published by the Department of Education and Science and are available at www.education.ie. An explanatory note on this scheme has also been published by Revenue and is available at www.revenue.ie under publications/technical guidelines.
In the case of the park and ride scheme, the relevant local authority must have certified that there has been compliance with guidelines that were issued by the Department of the Environment, Heritage and Local Government and that are now available from the Department of Transport.
There is a limit on the amount of qualifying expenditure that can be incurred on residential accommodation (both owner-occupied and rented) at a park and ride facility. If the construction expenditure in the residential element of a scheme exceeds 25% of the total allowable expenditure, there is no relief due for the residential element. Relief is only available for expenditure on construction, conversion
or refurbishment work that is carried out during the qualifying period. Allowable expenditure must therefore be directly attributable to work that was actually carried out during the qualifying period. Qualifying expenditure
Costs taken into account in calculating qualifying expenditure
Not all of the costs incurred by the purchaser, developer or builder in relation to the purchase of a newly constructed, refurbished or converted property are taken into account in calculating the amount of the qualifying expenditure.
Broadly speaking only the direct costs of construction and site clearance and preparation are allowed. It should be noted that the costs contained in the certificate of reasonable cost that is
issued by the Department of the Environment, Heritage and Local Government should not be used as a basis for calculating the relief.
Costs that are allowed in calculating the amount of the qualifying expenditure include;
* Direct construction, conversion or refurbishment costs such as cost of building materials, hire of equipment, labour costs, administrative overheads, architects' fees, legal fees
* Site clearance and preparation costs such as laying foundations, walls, power supply, drainage, sanitation and water supply
* Interest paid on money borrowed to fund direct construction, conversion or refurbishment costs
* Fees paid to local authorities for the provision of certain infrastructure and services.
Costs that are not allowed in calculating the amount of the qualifying expenditure include;
* Direct site costs or the cost of the pre-refurbished/converted building in the case of a refurbishment or conversion project
* Costs associated with the acquisition of the site or building such as legal fees and stamp duty
* Interest paid on money borrowed to fund the purchase of the site and interest on other borrowings not directly related to the construction, conversion or refurbishment costs
* Marketing and selling costs such as money spent on advertising the property and auctioneers' fees
* Costs attributable to a person's own labour, where the person is not a builder or developer and carries out work himself or herself.
The price paid for the completed property does not include legal and other professional fees and stamp duty paid in connection with the purchase of the property. Where a newly constructed property is purchased from a person who carries on the trade of a builder, the amount of the relief is calculated by using the following formula -
Price paid to builder X A divided by B + C
A = construction expenditure incurred in the qualifying period
B = total construction expenditure
C = expenditure on the acquisition of the site
Example:
A builder buys a derelict property for €100,000. He spends €50,000 directly on refurbishment and €4,000 on marketing and selling the refurbished property. He spends a further € 10,000 outside the qualifying period. He sells the refurbished property for €250,000 to Mr. Nolan.
The qualifying expenditure according to the formula is as follows;
250,000 X €50,000 / €60,000 + €100,000 = €78,125
Mr. Nolan's qualifying Section 23 expenditure is €78,125
The price paid is the actual purchase price of the property. The construction expenditure and site costs used in the formula are those incurred by the builder and not those charged to the purchaser by the builder.
The expenditure that qualifies for relief is the expenditure incurred directly on construction and the cost of site clearance and preparation. The formula operates to exclude the site cost so that relief is not available for the full amount paid to the
builder.
This is why Section 23 properties are advertised as qualifying for, for
example, 80% relief or 90% relief, depending on the cost of the site and any costs attributable to the purchase of the site. The amount of the relief includes a portion of the builder's profit.
The formula is generally used where newly constructed properties are purchased unused from a builder. However, in the case of the student accommodation scheme the formula can be used where a builder sells a property that has already been let by him under a qualifying lease. The period of such letting cannot exceed one year. This provision applies to sales of property on or after 5 December 2001. It caters for
situations where a builder lets a property to students at the start of an academic year while awaiting the sale of the property.
The same formula applies to the purchase of a newly refurbished or converted property from a builder with A and B in the formula being the refurbishment or conversion costs and C being the cost of the building, including site, prior to refurbishment or conversion. Where a newly constructed property is purchased from a person who does not carry on the trade of a builder, the amount of the relief is the lower of;
* The direct cost of construction, excluding site cost and costs attributable to the purchase of the site,
or
* The amount produced by the formula in section 1.5 above.
Generally, in a market where property prices are rising, the relief will be based on the expenditure on the construction work carried out during the qualifying period.
The purchase of a newly refurbished or converted property from a person who does not carry on the trade of a builder is treated in the same way as the purchase of a newly constructed property from that person.
Example
Mr. McDonald, a farmer, has some spare land and decides to construct a house on it. He engages a builder to carry out the construction and agrees to pay the builder €200,000. As Mr. McDonald already owned the land, there is no site cost. The builder spends €150,000 directly on the construction, all of which is carried out during the qualifying period. Mr. McDonald sells the house for €350,000. Qualifying
Section 23 expenditure according to the formula is as follows -
Price paid to non-builder X A / B + C
A = construction expenditure incurred in the qualifying period
B = total construction expenditure
C = expenditure on the acquisition of the site
350,000 X €150,000 / €150,000 = €350,000
However, in this case the amount of the qualifying Section 23 expenditure is €200,000, the cost of construction, as it is lower than the €350,000 produced by the price adjusting formula.
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