Last month, with the passage of the budget for 2025, a measure to reduce the fiscal advantages to landlords of letting short-term tourist accommodation was enacted.
The change is a technical one, concerning the use of depreciation in the accounts of a rental property. Depreciation is a concept that is used in business accounting to calculate the (often notional) decrease in the value of a fixed asset. It is also possible to capitalise, and so depreciate, major building works.
Depreciation is an annual charge against the revenue of the business, which reduces the taxable profit, although it has no impact on cash receipts.
For landlords of furnished lettings it is an extremely effective tool, as it can often eliminate entirely taxable profits.
Thus, assuming a property valued at €200,000, with furnishings and equipment with a value of €10,000, it is possible to depreciate the property over 30 years and the furnishings over 5 years, a charge in the accounts of €8,000 a year (€6,000 + €2,000). If the landlord receives €15,000 in rental income, against which there are other chargeable costs of €5,000, it means that the taxable profit is only €2,000, whilst net cash receipts are €10,000. The tax benefit over time is therefore normally substantial.
But the tax advantage for landlords does not stop there, for until now non-professional landlords (LMNP) who later sell the property did not have to take into account depreciation in the calculation of the capital gain. So, using the example above, if over several years the property had been depreciated by €50,000 and it was sold for €300,000 the reduction in the accounting value of the property is ignored, so that instead of the capital gain being calculated on €150,000 (€200,000 - €50,000) the original purchase cost is used. As a result, the capital gains tax bill is reduced.
Although, the use of a depreciation charge in the accounts will still be permitted, in future the depreciated value of the property will have to be used in the calculation of the liability to capital gains tax.
In bald terms, using our example, without reintegration of deprecation the capital gains on €100,000 would be €36 200 (19 % CGT + 17,2 % social charges). However, if the depreciated value of the property is used (€150,000) the tax bill rises to €54,300.
Nevertheless, the change only concerns landlords who decide to sell their property but if it is retained as a letting, or transferred to a family member, the substantial tax advantage of depreciation is retained without penalty.
In addition, for landlords who are prepared to hold off on the sale of the property, after 6 years of ownership there is tapered relief from capital gains tax, which reaches 100% after 22 years for CGT and 30 years for social charges.
Moreover, it is also possible to terminate the furnished lettings activity, either by switching to letting on an unfurnished basis (when no depreciation is possible) or to cease lettings activity entirely, when it would then be possible to sell the property without the need to reintegrate depreciation, although a respectful interval between cessation and sale would be advisable.
Note also that depreciation of major building works and improvements are ignored in the calculation for capital gains tax.
In addition, only depreciation actually entered into the accounts is used in the calculation, an important point given that running costs in the early years are likely to be substantial, and that under the rules depreciation cannot be used to create a deficit.
The use of depreciation is not available to those who use the micro system of taxation, which grants a fixed tax allowance for costs. In effect, the allowance granted under micro assumes a level of depreciation. To use depreciation actively, it is necessary to opt for the régime réel (profit and loss) accounting method.
These changes do not impact on professional landlords (LMP) whose accounting rules are even tougher. In addition, investors in purpose-built student accommodation, or for elderly and disabled persons are unaffected.
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