# What is "RENTING ON AN UNECONOMIC BASIS"



## erso (26 Jan 2013)

According to the Guide to Rental Income, you are not allowed to claim for "Expenses incurred in the letting of premises on an uneconomic basis."
Can someone kindly explain this? Thanks


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## T McGibney (26 Jan 2013)

It refers to situations where there is no possibility whatsoever of making a profit from rents received. 

An example would be a property developer who borrows €1m to buy a field in the hope of getting planning for apartments, the planning goes pear shaped and they end up renting the field to a farmer for €1,000 per year. 

If the developer has an annual interest bill of €50,000 on the loan, they will be making a loss of €49,00 each year but won't be allowed claim any tax relief on that loss as the loss is deemed uneconomic.


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## mandelbrot (26 Jan 2013)

erso said:


> According to the Guide to Rental Income, you are not allowed to claim for "Expenses incurred in the letting of premises on an uneconomic basis."
> Can someone kindly explain this? Thanks



http://www.charteredaccountants.ie/taxsource/1997/en/act/pub/0039/nfg/sec0075-nfg.html

Read that, (particularly the last paragraph) and come back if it's still unclear...


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## erso (27 Jan 2013)

Thank you


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## Joe_90 (27 Jan 2013)

Are there degrees of uneconomic lettings?


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## mandelbrot (27 Jan 2013)

Joe_90 said:


> Are there degrees of uneconomic lettings?



I don't really understand what you mean by this, there's uneconomic and there's not - presumably the Inspector determines based on the facts, and then it's open to the taxpayer to appeal.


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## oldnick (27 Jan 2013)

Possibly Joe90 may mean something like ...

1) Like thousands of  recent BTL owners on ,say, ghost estates or overstocked areas, Mrs Smith can only rent for a tiny sum - far less than the costs (inc.interest). She is letting on an "uneconomic" basis.
Does this mean she can't offset the loss against a property she may also be  letting at a profit?

2) Mr Jones buys a property and lets at a profit. Due to noisy construction works property not lettable  on an "economical" basis. 
Does this mean he can't C/F the expenses/losses (interest etc)until the property is economically lettable again ?


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## Joe_90 (27 Jan 2013)

Is a case V loss always disallowed. If actual interest, management charges, repairs and insurance exceed the rent then there is a loss that's uneconomic.

If you have to give a tenant a rent reduction and expenses exceed income there's a loss.  If the property is not let the expenses exceed the income.  Uneconomic.


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## mandelbrot (27 Jan 2013)

To me, letting on an uneconomical basis has to involve an intention not to maximise the economic return from the premises, or at least the presence of objective evidence that that is what is happening.

Just because you have acquired an asset and subsequent market forces prevent you from being able to let it at a rent that results in a profit doesn't mean that you are not letting it on an economic basis - as Oldnick points out that would result in a nonsense whereby swathes of reluctant landlords, or BTL owners who bought at the peak of the market, would be taxed differently from people who took the same actions with the same intentions.

I'd suggest that if one can objectively demonstrate that the use of the property, and the rent derived from it, is the best that the market will bear, then the letting is on an economic basis.

Here's an example of an uneconomic letting -


Daddy, who has a rental portfolio, plenty of equity, buys a house, with a mortgage on it,
Lets it to Junior for €100 per month, €1,200 p.a.
The mortgage interest is €5,000 p.a.
75% of this is €3,750
This would result in a rental loss, augmented by other allowable costs, so say a total loss of €5k p.a.
Daddy then uses this loss to reduce other rental income by €5k, thereby saving himself c.€2.5k in taxes.


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## mandelbrot (27 Jan 2013)

Another example of an uneconomic letting - 


A company buys/builds/develops a commercial premises, a shop or a showroom, again using borrowed funds / mortgage.
It lets this premises to a related company at a negligible rent, far below the open market rent for a similar property.


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## oldnick (27 Jan 2013)

Mandelbrot

Many thanks ! 

OP's query was something that had been on my mind . 
Whilst I understood the meaning of uneconomic in the literal sense, I couldn't accept that Revenue really meant it as uneconomic- full stop, no exceptions.
 But I was too scared to ask them in case they disallowed some losses B/F on an "uneconomic" letting.

Your explanation is a relief. I don't know why you give such sage advice for free - but I'm glad that you do ! Cheers.


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## mandelbrot (27 Jan 2013)

oldnick said:


> Mandelbrot
> 
> Many thanks !
> 
> ...



I've only expressed my own opinion / gut feeling in what I said above, but it  would certainly be the commonsense interpretation of the relevant part  of the legislation.

As Joe90's post indicates, too narrow an  interpretation of the meaning of "uneconomic" would result in there  being no such thing as an allowable Case V loss, which obviously is not  the intention of the Act, since it effectively provides that in many  ways a Case V income source is to be treated as a "trade" of sorts, and the same computational rules apply. The  nature of trade is that you can make either a profit or a loss.


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## mandelbrot (29 Jan 2013)

OK, having had time to look at this and clarify this:

S.75 TCA 97 sets out the basis of assessment for Case V (rental income).

S.75(4) says in plain English (quote taken from the Notes for Guidance):
"Excluded from the Case V basis of assessment and from sections 97 (Case V computational rules) and 384 (treatment of Case V losses) is rent reserved under a lease which is insufficient, taking one year with another, to meet —
• the lessor’s cost of any obligations under the lease, and
• any expenses of maintenance, repairs, insurance and management of the leased premises (including lands, tenements and hereditaments) which are borne by the lessor."

It means that if your rent doesnn't even cover the basics of insurance, maintenance & management, then it's not an economic letting. Because it effectively means you are letting someone else use a property for less than the underlying costs of outright ownership of it - subsidising their use of it.

So this doesn't include the interest cost (presumably how you finance it is your own business).


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## Bronte (29 Jan 2013)

This is very confusing.  But I'd imagine a lot of people who purchased properties in remote parts of Ireland cannot even cover insurance and management costs.  We had a poster, Eleinem I think, who mentioned she'd bought such a property and couldn't get any rent.  

Anyone in this situation would want to clarify with their accountant and/or revenue.


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## mandelbrot (29 Jan 2013)

I presume you're talking about are houses that are available to let but simply can't be let due to lack of demand, and sit vacant for a big chunk of the year. These aren't uneconomic lettings.

This is a real red herring topic for the majority of people; I'd suspect this is an anti-avoidance provision, to prevent people from messing around, generating false losses - "you let yours to me for 50p and I'll let mine to you for 50p and we'll both generate rental losses that can be used against our other rental profits" type of scenarios...


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## Bronte (29 Jan 2013)

Yes, agreed it seems to be an anti avoidence measure.  Your post before the last one seemed to imply that uneconomic also meant those kind of properties.


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## mandelbrot (29 Jan 2013)

Bronte said:


> Yes, agreed it seems to be an anti avoidence measure. Your post before the last one seemed to imply that uneconomic also meant those kind of properties.


 
I don't see how it's confusing - unless you aren't realising that to establish whether a letting is economic or not you'd have to take a full year's rent against a full year's costs of ownership. It'd be illogical to compare a couple of months' letting income to a full year's costs and say that the letting wasn't economic.

Presumably any house, let for 12 months at a market rent, even in the Wild Wesht would recover the basic cost of insuring & carrying out basic maintenance on it. The meaning of "taking one year with the next" is that say you have to repair something substantial this year, like a leaking roof causing a bit of water damage, and this causes a loss - this wouldn't be a normal event expected to happen every year.

Even in the event that somehow a full year's letting still wouldn't cover the basic costs of ownership, if it were me I'd be putting my argument to the Inspector that it's patently not "uneconomic" if you are suffering from extraneous market forces, obtaining the best rent you can from the property, and selling is not an option due to negative equity etc... Put it this way, I wouldn't want to be the tax inspector standing in front of an appeal commissioner or a judge and trying to say that some reluctant landlord was running afoul of this provision!


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## net64 (8 Nov 2013)

Thought it might be easier to bump this old thread rather than start a new one.

I'm pretty sure Revenue use the "uneconomic letting" rule as anti-avoidance to stop people letting at below market rent value to relatives etc.

But, I have a loss for the last  tax years because my apartment was vacant for 9 mths.  I'm I right in thinking that Revenue allow expenses between two lettings in full ?  I didn't occupy it and was actively seeking a new tenant.

For example, I let the property for 12 mths on 2011 at a profit.  In 2012, say, it was vacant for July to Mar 2013 (and re let successfully from March 2013 onwards).

Now I have a full years insurance, Mortgage Interest etc which exceed my Gross Rents for 2012. My reading of the rule is that expenses incurred between lettings are deductible (as opposed to most pre-letting exps)

I presume this could not be considered an "uneconomic letting" ?  and it is ok to claim the loss (it will return to profit for 2013)


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## mandelbrot (8 Nov 2013)

net64 said:


> Thought it might be easier to bump this old thread rather than start a new one.
> 
> I'm pretty sure Revenue use the "uneconomic letting" rule as anti-avoidance to stop people letting at below market rent value to relatives etc.
> 
> ...



There'll be no problem as long as you can demonstrate how/why the property remained unlet - uneconomic rents doesn't come into it, the question really would be whether the property was a bona fide rental property during the 9-month interval.


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## net64 (8 Nov 2013)

Mandelbrot,
Thanks for the reply.


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