Reduced/Partial Rent for a family friend

bailey99

I was approached by a friend of mine who asked me my advice on a tax. Moreso from a tax implication perspective really. I gave them my opinion but I was thinking afterwards did I give them the right advice. I would be interested to hear others thoughts.

The persons has an apartment and the tenants are moving out at the end of the month. The rent can be increased to approximately €1,500 a month I was told, so I'm guessing it's abut €1,470 at the moment or thereabouts. They were asked by a friend of theirs, who I don't know, if they would rent the property to a son of theirs and his girlfriend. The apartment owner was seeing if he could do so, reducing the rent charged but maintaining the existing 'market' rent at €1,500. Something along the lines of the below.

New tenants pay €1000 a month instead of €1500. They (a couple) are in effect getting €500 a month, or €6,000 a year "gift" from the landlord. This has no tax implications from what I understand as Person A can give a total stranger €3000 a year gift tax free and it doesn't need to be reported to Revenue or anything like that. No issue I agreed/thought so far.

Now the landlord as the same time, while happy to do the friends son and girlfriend a favour and get a safe, reliable tenant in their apartment, still didn't want to be out of pocket for doing so, was proposing asking for a €2,000 gift from them tax free at some point over the course of the year.

I initially thought that this was tax evasion (which is illegal) but the more I'm thinking about it, I think its tax avoidance (which is legal). I'd be interested to get people's thoughts or might actually query it with Revenue. As it doesn't relate to me, I can do so without fear of reprisel really.

Buddy Bubs

Interesting idea and worth pursuing. Just wondering does the business relationship somehow disallow this if, in the unlikely event, it ended up in front of a judge

HeidiHeidi

What if they don't come up with the 2K "gift", if they'll even agree to that dubious set-up in the first place?

What's going to be on the lease, and RTB registration - will that affect future rental potential?

If it's €1500, why isn't €1500 going into their account every month? They will be liable for tax on €1500.

If it's €1000, and the tenant stays for years, that's a lot of rent foregone, and a lot of €2k "gifts" to be relying on. And when the tenant leaves can they hike the rent back up to (original level + 2% per year)?

It doesn't sound like tax evasion to me (IANAL), but it sounds like a very bad deal for the landlord

TheWonderLlama

the landlord is going to pay tax on €1,500 per month while only receiving €1k? Not the best business decision.

Will the son and daughter claim rent tax credit? at what rate?

The rate is the rate, by all means give a family friend a discount, but be clear on it. Asking someone for a gift isn't a gift, its a demand. Its a recipe for disaster.

bailey99

https://www.boards.ie/discussion/comment/120019260#Comment_120019260

you pay tax on the rent received, not the rent you should pay. If a tenant is non-paying for a year, I don't believe a landlord would pay tax on the rent he would have received but didn't receive anything.

https://www.boards.ie/discussion/comment/120019249#Comment_120019249

the landlord is in the same position after tax as renting to a stranger. There is security in knowing the tenant and there would be no issues re gift of €2000 from tenants absolutely. The tenants would benefit as instead of paying €18,000 a year rent, they would be paying €12,000 plus €2000 gift.

bailey99

https://www.boards.ie/discussion/comment/120019220#Comment_120019220

this was in my thoughts as well. if there's a financial contract, would it negate ones ability to get a gift from the other party. From my reading, there's no such stipulation in the law on the small gift threshold of €3,000

HeidiHeidi

https://www.boards.ie/discussion/comment/120019320#Comment_120019320

But the whole point of this caper is to maintain the facade of €1500 rent, so that they can maximise future rents under RPZ rules.

Otherwise what's the point of the whole "gifting" thing?

It's effectively a portion of the rent "under the table", which I'm fairly sure Revenue would take a dim view of.

And is the "gifting" enforceable, if the tenants/parents decide they don't fancy it after a year or two?

Furze99

Your friend can let at whatever rate they like, subject to any increase according to zoning that might apply. Whether than be €0 or €500 or €1500.

The issue here is that they seem to be keen to do this without being 'out of pocket'. Can't have it both ways afaik.

Iodine1

Absolute minefield you are walking into and likely to find yourself in court over it. Drop the rent and landlord cannot bring it back up as law says 2% on the last rent paid regardless of who paid it, not someone in the past history. Dispute occurs and the lovely girlfriend complains to the RTB, spill all on your scheme, they will look at the facts and you will both lose the dispute and find yourself in court over breaking the law. And after all that you will never get rid of the girlfriend and possibly her new man as she has rights and cannot find anywhere she can afford........your friend and the ex son wont want anything to do with it.

Keep everything transparent and lawful as landlords have no sympathy or friends in society, especially when things go sour.

herbalplants

I agree a waking disaster only for the landlord.

Also from my previous experience, the worst outcome you get from doing business with your family and friends. You are better off in these dealings with a stranger as friends expect discounts.

bailey99

Thanks for the feedback. My initial feedback was to veer away from it. It was more my thinking afterwards and the correlation between the gift to tenants by way of reduced rent and then the gift from tenant it tenants parent to the landlord or landlords sister or something.

I googled it a bit more and it seems there's no issue with someone giving a gift to someone who they are involved with in a business setting.

DubCount

https://www.boards.ie/discussion/comment/120019320#Comment_120019320

I dont think that is fully correct for a start. The basis of assessment for rental income is on income "arising" and not on rent received or on an accruals basis. The income "arising" phrase means that it is the rent the LL is entitled to receive under the lease or could sue the tenant for in court. If the lease says 1500 per month, its taxable as 1500 per month, even if the LL is only receiving 1000 per month. (I know thats nuts, but those are the rules)

As far as the 2000 gift idea is concerned, I reckon that would be covered under general anti-avoidance provisions. Its effectively a rent payment, and would be taxed as a rent payment. calling it a gift, wont change the facts.

When dealing with Revenue, a straight bat is always advised. Dreaming up complex constructs which have avoided the best tax advisors in the land are unlikely to be workable.

alias no.9

https://www.boards.ie/discussion/comment/120019983#Comment_120019983

For the benefit of the great unwashed, me included, in the scenario that the basis of assessment is on income arising as you say, would any unpaid rent not become a loss that is offset against the income for the accounting period?

I get the principle of fully documented accounts but there's now way that a tax liability can occur where rent is unpaid for a period and unrecoverable which is the extreme case of rent not being paid in full.

Bass Reeves

What is being proposed is highly dangerous for the LL. I have heard where LL give a rebate for hassle free tenants. Now I am not sure whether the rent is paid and discounted after or the discounted rent is only paid.

I would forget about the gift off them if they want to give you part of the rent in cash every month what you do with it is your own business.

I know a lad that had rented a property without registration to a friend's son and partner he is paying his tax on the income but they are in the process of building a house. It's discounted a good bit, however you need a lot of trust.

bailey99

https://www.boards.ie/discussion/comment/120019983#Comment_120019983

Your notion is bonkers to the extreme. Assuming rent is 2000 euro per month. But the tenant pays nothing for 2 years before being evicted.

Are you actually arguing that the landlord would be liable to pay €12000 (assuming no costs incurred) each year. Really?

HeidiHeidi

But you're arguing that the rent would/should be set at 1500. Therefore it will be taxed at 1500.

The fact that the landlord is prepared to forego 33% of that for altruistic reasons is neither here nor there.

Dial Hard

I rented under a similar arrangement for almost a decade. Whole house rent was slightly under market value, 2/3rds was paid by EFT and the balance in cash. Tenancy was never registered and the house was sold as the owner's PPR earlier this year with absolutely no issues.

Dial Hard

I suspect such arrangements are far more common than people let on and despite all the dire warnings you hear on here, I'd say more people get away with it than anyone here would like to think.

Obviously, the downside is that you don't have any comeback when the situation changes - I got three months' notice when my landlady decided to sell the house. But dem's de breaks. I'd happily enter into a similar arrangement again but property owners would sadly (but understandably) leave their spaces vacant than take the risk. It sucks.

DubCount

https://www.boards.ie/discussion/comment/120020107#Comment_120020107

That depends on the reason for non payment. Revenue take into account only certain circumstances of non-payment (non payment was a genuine default by a tenant, or circumstances where rent is waived to avoid genuine hardship). A LL may have to prove the circumstances of non-payment (case lodged with RTB etc). Having an arrangement with a family member to circumvent RPZ rules is not going to wash IMHO.

DubCount

https://www.boards.ie/discussion/comment/120020171#Comment_120020171

There is an allowance for non-payment for a genuine default of the tenant. The LL must be able to prove this. In your scenario, there will be notices to the tenant and cases lodged with RTB etc. No problem there. Thats very different to a situation where the lease says 1500, and the LL is accepting 1000 with no intention of trying to recoup the shortfall against a family member.

Interestingly though, if the tenant stops paying and the LL is still incurring costs, the tax loss that is created can only be used against other rental profits. For a 1 property Landlord, this means the tax losses may never be usable.

Manion

This is hairbrained. Set rent at 1500 and pay 780 euro in tax (assuming 52% marginal) but only receive 1000 euro meaning your net after tax is only 220 euro a month versus 720 euro being straight with the rent. If your friend just set the rent at 1000 euro they would be net profits would be 480 a month. The optional value of being able to charge a higher rent in the future is costing 260 euro a month. If the property is rented for 3 years at 1000 a month but with declared rent of 1500, they will have gifted 15000 euro out of their own pocket to this friend. Must be a very close friend.

Lets assume after 3 years the rent can go officially back to 1500, and your friend gets 720 euro after tax a month. This option has been costing them 260 a month compared to just being straight. After approximately 1 year it's a wash, it's year five before your friends starts seeing the value of that.

Three scenarios:

Scenario 1 - mad scheme or renting at 1000 but declaring 1500 in income.

Profit first 3 years = 7920

Profit next 3 years = 25920

Total = 33840

Scenario 2 - Same as 1 but being straight at 1000

Profit first 3 years = 17280

Profit next 3 years = 17280

Total = 34560

Scenario 3 - Just rent normally at 1500

Profit first 3 years = 25920

Profit next 3 years = 25920

Total = 51840

Too much focus on how to circumvent the tax man in this thread. All that matter is what's net in your pocket. There's such a thing as trying to be too cute. Obviously a bunch of people in the thread are reading between the lines and perhaps reading stuff into the topic that the OP didn't state.

HeidiHeidi

All of the above in the case of the first 3 years stands, but if the landlord charges 1000, and declares it as such, then after 3 years they can only increase the rent to 1061 (as current RPZ rules stand).

Hence all the shenanigans in order to maintain the facade of renting at 1500.

Huge ongoing losses on rental income, and potential selling price if they do anything other than maximise the rent every year.

Which means that landlords can't reward good/reliable/related/trusted tenants without costing themselves an absolute fortune.

Manion

That's scenario 2 above. Note, you're not guaranteed to be able to I crease rents at all once they have been lowered, so I assume no increase.

DownByTheGarden

OP I have a story for you of a friend of mine who rented at a very cheap rent to his nephew.

They all got along grand so noone thought anything could go wrong when he rented the apartment to his nephew at half of the market rate. They were all very happy with the situation.

Roll on 2 years : In the meantime the nephews girlfriend moved in, got pregnant and had a baby. All was still fine and everyone was still happy.

Roll on another year. My friend split up with his wife. Was kicked out of the family home. And was sleeping on another friends couch. He decided he should go to live in his apartment.

So when he sugggested this, they refused to move out. he is still on the couch of a friend. The RTP are involved and the nephew and gf have spilled the beans to the RTB on every little underhand payment that was ever made. Everyone in the family now thinks hes an evil pr!ck who is booting out a pregnant woman from her "home". Now add into the mix that his wife now wants to sell the apartment.

A holy mess. That all started out as someone doing a family member a favor.

herbalplants

https://www.boards.ie/discussion/comment/120024723#Comment_120024723

Yes I agree, doing business with family most times not a good outcome. They are too familiar to the owner, it gets messy.

Donald Trump

Lads, don't be so naive. It's some landlord trying to either get around rent cap, or else trying to figure out a way to reduce their tax bill by having part of the rent dressed up as a "gift". Or possibly to keep under the limit for rent-a-room relief.

Which won't work as described anyway. The rent is 1500. You will be taxed on it as that. The fact you want to give a gift of 6k to the tenants is neither here nor there for that purposes.

If you officially rent it to them for 1000, they could in theory be liable for gift tax on the reduction (although their annual exemption threshold will cover it)

DownByTheGarden

https://www.boards.ie/discussion/comment/120027017#Comment_120027017

Also forces other previously friendly family members to take sides with one of them. NEver seen it happen where in a family dispute that sensible family members would just say, just between you two, leave the rest of the family out of it.

FishOnABike

If the OP wants to help their friend out it seems they would be better off renting to someone else at full market rate. Let their friend rent somewhere else at full maret rate and the OP just gift their friend a few hundred euro every month.