As house prices and mortgage levels have increased, many first time buyers are seeking to add to income by renting out rooms in their newly acquired houses. Most lenders will take the potential for such income into account when assessing borrowing capacity.

Information

• If you rent out a room (or rooms) in your principal private residence to private tenants during the relevant tax year, the rental income you earn will be exempt from income tax, provided this income does not exceed €10,000 (in 2008). This is called the "Rent a room" scheme. Where more than one individual is entitled to benefit from the rent (i.e., you and your spouse, etc.), the limit of €10,000 is divided between the individuals concerned. Tenants who rent out a room(s) in your home are entitled to claim tax relief in interest paid.

If you are renting a room in your home to your son or daughter you cannot get tax relief on the rental income.

If you choose to rent out a room(s) in your home, you are not covered by landlord/tenant legislation in Ireland. This means that you are not obliged to register with the PRTB as a landlord, provide a rent book to the tenant or ensure that the accommodation provided meets any physical standards.

This also means that private tenants living in your principal home are living under a "Licensee Agreement" not a tenancy agreement and are really only entitled to "reasonable notice" if you choose to terminate the agreement. Tenants are, however, entitled to refer disputes regarding periods of reasonable notice, retention of deposits, and disputes regarding deductions from rent for damage to property that is over and above normal "wear and tear" to the Small Claims Court.

Before you agree or choose to rent out a room(s) in your home therefore, it is strongly recommended that you and the tenant(s) agree some ground-rules in advance. You should put these ground-rules in writing and both parties (i.e., you and your tenant) should sign and each keep a copy of this agreement so you can both refer to the terms of your agreement in the event of confusion or disagreement. Some of the ground-rules you might consider are:

• What will the period of the tenancy be?
• What will be the minimum periods of notice if either party chooses to terminate the agreement?
• How much will the rent be and when can this be reviewed?
• How will rent be paid and is rent to be paid weekly/fortnightly/monthly?
• What is the situation regarding visitors and friends staying over?
• Are there any restrictions regarding noise levels?

Effect of rental income on social welfare payments

If you are getting a means-tested social assistance payment from the Department of Social and Family Affairs any rental income you get will be assessed as means and may effect your payment. However, rental income will not be assessed as means, if you are getting an State Pension (Non-Contributory) or Widow's/Widower's (Non-Contributory) Pension and you would be living alone unless you rented out a room in your home.

Rules

The total (gross) rent you receive (which includes sums the tenant pays for food, laundry or similar goods and services) cannot exceed €10,000. If you receive rental income over and above this amount, you are not entitled to the relief.

A residence that qualifies for tax exemption must be in Ireland and must be occupied by you during the year of assessment as your principal private residence.

If you are receiving mortgage interest relief you will not be affected by renting a room in your home in this way. Renting a room in your house under the scheme does not affect your exemption from Capital Gains tax when you sell your principal private residence.

You can choose that this relief does not apply in a particular year of assessment by writing to the Inspector of Taxes in your tax district, prior to filing your tax returns for the period in which the room was rented.

While the income you receive from renting a room or rooms in your principal private residence is not liable to either PRSI or the 2% health levy, it must be included on your annual income tax return.

There is no deduction for expenses made in working out the rental income received. If the income you receive does not exceed the limit in the year (currently €10,000), then these profits/losses are treated as "nil" for the year of assessment.

You will not get Rent a Room tax relief if your gross income from rent is over €10,000. In this case, your net rental income will be treated by Revenue as part of your total income and should be included in your tax return.

Rates

Rental income achieved from renting a room(s) in your home is exempt from tax up to a maximum limit of €10,000 (2008).

How to apply

Complete a Tax Return Form (Form 12) at the end of the tax year indicating that you have received income from the "Rent a room" scheme. Form 12 is available from your local tax office. Your completed annual tax return should be returned to your local tax office. Your local tax office can answer any queries you may have and will assist if you have any difficulties completing your annual Tax Return.