UK Taxation Treatment for Rental Income, Overseas Property, Rent a Room Relief

Property Rental Income for Individuals

UK Rents and licences are regarded as UK land and property. Land and property income is all income deriving from such property as if it were a trade. Therefore this is calculated as all income being assessed in the tax year on an ‘accruals’ basis. This means that income is taxed on an ‘arising’ basis in the year of assessment, i.e. income that is due in the year, and not necessary income that is actually paid by the tenant.

For example if a tenant per the tenancy agreement is obliged to pay £495 a month, the taxable income is £5,940 a year, irrespective of the fact the tenant might say pay late for their rent.

Since rental income is assessment like trade, all income from the different rental properties are pooled together, creating one income stream. Hence profits and losses of the same UK properties are amalgamated together to create the net profit or loss. In essence losses from one property is netted off against profits of the other.

If they are losses overall after pooling all the properties together, then these losses can be carried forward against future profits of property income. These losses cannot be set off against other income, e.g. employment income or self employed income. However, if losses arise due to ‘capital allowances’ this may then be relieved against other general income.

Capital allowances is the allowable decrease in value of the assets each year that are used in the properties. For e.g. fridges and ovens. Capital allowance rates will be 20% or 25% a year depending on current capital allowance rates.

Expenses are allowed to be deducted if they are incurred ‘wholly and exclusively’ for the purposes of the property.

The treatment for limited companies broadly follows the same rules as for UK individuals.

Income from Overseas Property for UK Residents and Domicile


Do I Need an LLC for My Rental Property?

LLCs and real estate seem to go hand in hand these days. Anyone to whom you speak that dabbles in real estate investing understands the need for liability protection, but may not understand the proper way to protect themselves. Their insurance broker may have told them that an umbrella policy will do the trick, but I am of a different opinion. Using an entity to hold real estate is a fantastic way to protect yourself from liability, provide some tax benefits and give you peace of mind that your personal assets are protected.

Many clients come to me before they buy a rental property to understand all of the ins and outs of real estate investing and how to protect themselves. Now, there are many different ways to structure a real estate investing empire, but I want to focus on using the LLC to hold property. An LLC, or Limited Liability Company, is a great entity in which to hold property. The ease of formation and limited formalities that need to be adhered to make the LLC a good fit for a real estate investor that wants to focus on finding deals, not handling paperwork. There is no board meetings, annual filings and burdensome minutes that are drafted every month.

Another benefit of an LLC is the tax treatment. As a single member LLC, there are no additional federal tax filings that need to be made unless a corporate tax election is made (outside the scope of this post), so the LLC is essentially taxed as a sole proprietorship on your individual return. If there are 2 or more owners, the LLC is taxed as a partnership (again unless a corporate election is made) and the income and losses pass through to the owners individual tax returns. No double taxation.

Lastly, because of the ease of set up and managing, LLCs can be used to help spread liability risks between entities. Most of my clients put no more than 2-3 properties into 1 LLC, thereby keeping the risk spread between entities. For example, if a client has 6 properties that are owned in 3 separate LLCs and someone gets hurt in property 1, owned by LLC 1, that person will only be able to get at the properties owned by LLC 1, barring special circumstances. If all 6 were owned by the same LLC, all of the equity in those properties would be at risk.

As you can see, LLCs are great vehicles in which to hold real estate from a liability and tax perspective. We have only scratched the surface with this discussion. If you would like to find out more about forming LLCs to hold real estate and the do’s and don’ts, contact our office today at


Austin Texas Rental Market Will Grow Through 2014!

As the rest of the US and global markets remain uncertain, Austin Texas is looking as bright as ever according to economist Angelos Angelou. “We will have a healthy economy, the envy of many cities around the country, Austin today leads the charts on every measure of economic growth one can think of.”

Angelos is generally very conservative when making employment forecasts. He predicted 19,000 new jobs in 2012 however; we ended 26,000, which is a welcome sight!

The areas already booming population will expand another 7 percent by 2014, Angelou said, coming just shy of 2 million. Meanwhile, Austin employers will add 29,000 jobs next year and another 30,000 in 2014

Unemployment lowered to 5.3%, which is well below the 7.8% national average spurred by a business and tax friendly environment.

The country and large employers are noticing, he stated, pointing to Apple, Facebook, GM, Visa and Samsung, which call Austin home. Furthermore, Apple is on-track to double its workforce in the coming years, which may make it the largest employer in Austin.

Austin hosted its first Formula One race which was a huge hit and brought millions in tax revenue to the city. South by Southwest and ACL also continue to grow. This positive impact has been seen with the low occupancy rate in the hospitality and increasing wages.

Real estate values and rents remain strong. Continued population growth has the potential to create a lasting and severe shortage of residential real estate in the near future, Angelou said.

Savvy investors know that real estate is a great way to build real wealth. With rental property you have multiple income streams that are increasing your wealth:

  • Cash on cash return (ROI from rental income)
  • Property appreciation (wealth increases)
  • Tenants paying mortgage builds equity/wealth for you!
  • Tax benefits (Write-offs, deprecation, etc)
  • Purchase equity

The Austin TX rental property market offers great cash flow whether you are investing in single family homes, multi-units or apartment complexes. Each has its advantage and disadvantage. We personally focus on single family and up to 4plexes as opposed to apartments. This is due to the ease of obtaining traditional financing and the amount of foreclosures on the market. Furthermore we see huge upside on home values as the markets continue to normalize. Apartment complexes do tend to offer better cash on cash returns but the financing is harder to obtain and the value of the property is tied more to rental prices rather than comparables.


Choosing a Licensed Vacation Rental: Why It’s Wise to Rent From an Established Local Rental Agency

Vacation rentals offer a great value to travelers and have become increasingly popular as travel accommodations. This trend has been driven by the plethora of unsold homes and condos in this economy coupled with the rapid proliferation of mega vacation rental websites such as HomeAway, where property owners can advertise and rent out their own houses.

Some mega vacation rental website ad campaigns poke fun at hotel rooms and point out the many advantages of renting private houses that include more space and privacy, a better overall value and a chance to experience living in a local neighborhood. Plus, property owners can help offset the expenses of their property by renting their properties to vacationers. These advantages are true, but there are some important ‘buyer beware’ issues pertaining to local licensing and rental restrictions that have been overlooked in vacation rental news. Bottom line is that it’s wise to rent a vacation rental property from an established locally operated rental agency with representatives that know the local regulations and are familiar with the local residential neighborhoods. Let’s take a brief look at why and consider these issues.

Many communities throughout the U.S. and in Europe have very specific licensing restrictions and laws regarding offering a private home as vacation lodging. If a property is not properly licensed to rent ‘short-term’ as a vacation rental, or is located in a neighborhood where vacation lodging is not allowed, it can actually be illegal to rent the property on a short-term basis.

There are some incidents where property owners who advertise their homes as vacation rentals on mega websites such as HomeAway and Craigslist, have been unaware of or chosen to ignore local laws restricting vacation rentals. They advertise and rent their properties anyway, hoping to go undetected. Some tourist communities even have code enforcement departments where officers look for violations by reviewing websites and in extreme cases, where neighbors have complained, they actually visit occupied houses to determine if an illegal rental is in process. Unfortunately, in a situation like this, an unknowing tourist who has rented the illegal house, can become a third party to unknowingly breaking the law. There have been instances where guests have actually been evicted from the property they rented in the middle of their vacation, and property owners have wound up in court for violating regulations that result in hefty fines.

At first it may seem unbelievable or unreasonable that there are local ordinances and laws that restrict property owners from offering their houses to vacationers. Some insist restrictions are a violation of property rights. However, the general intent is to protect and preserve residential neighborhoods where full time residents have been disturbed by a ‘revolving door’ of renters who show up in their neighborhood for short periods of time to party. In many communities, such as Key West, Florida, legal vacation rental properties must have a short-term rental license issued from the City.

Another issue to keep in mind is that in most communities, property owners or agencies who rent private properties as vacation rentals are obligated to collect a state sales tax and often a county bed tax from the guests just as hotel / motel lodging is required to do. If this tax is not collected from the guests renting a property, it is a good indication that the property is being rented illegally.

With these caveats in mind, private vacation rentals are still an excellent value for tourists. Families can stay together and enjoy more space, more privacy, and often times luxury amenities such as swimming pools and Jacuzzi tubs. Money saved by renting a house can be spent in the community on dining out and fun activities, and that becomes an economic boost for the communities.

One way for travelers to be sure their investment is protected is to rent from an established licensed and locally operated vacation rental business with representatives who know the community and the local regulations and laws. An excellent Key West rental agency with premium private island homes can bee seen on-line at


7 Ways To Maximise Your Rental Deductions

A negatively geared rental property is a great way to reduce your tax, but some do not take full advantage of the tax deductions available. I have compiled a list of seven ways to maximise your deductions and get the most out of your property:

  1. Try and arrange an interest only loan on your rental property. If you have surplus cash you are best to pay down non-deductible debts not related to the property, such as home loans, credit cards, personal loans etc.
  2. You can claim depreciation on a property, but this is something that very few people actually do. A quantity surveyor can produce a report which allows you to claim depreciation. This is such an effective tax deduction because you are not out of pocket for depreciation expenses. This is a major deduction, especially in new properties, but so many people miss out on this.
  3. Keep a folder where you hold all your receipts once you have paid your expenses. This means you will not forget about the rates notice, or the times you had the lawns mowed, as the receipt will be in the folder when you visit your accountant at tax time.
  4. Every dollar counts, even if you spend $1 on a washer from the hardware store to fix a leaking sink you must keep that receipt because every dollar adds up.
  5. Keeping with the theme of “every dollar adds up” make a log of every time you phone or post items to your estate agent or tenant, these items can also add up.
  6. If you are making a repair to the property, please consult us before you go ahead with it. Some items may be classed as improvements and therefore be depreciated over its effective life, rather than written off in the year the expense was incurred. Did you know that replacing damaged polished floors with carpet would normally be classed as an improvement and make it depreciable?
  7. Keep a log book of the times you travel to see your rental property. You should be able to claim this as a deduction. This deduction may have to be apportioned if part of your travel is for a holiday.

This is not an exhaustive list, but it can help you get the most out of your rental property. Always remember, if you are making any decisions and you are not sure if it will be deductible, call your accountant to discuss.


Vacation Rental 1031 Exchange

We are often asked whether tax liability from the sale of a vacation home can be deferred using the procedures of IRC section 1031. The answer to this question is found in Revenue Procedure 2008-16.

The general rule for ALL 1031 exchanges is that the property must be held for primarily for investment of use in trade or business. In order to prove that your vacation home is held primarily for investment, and is therefore 1031 eligible, rather than for your own personal use the Internal Revenue Service (IRS) set out specific parameters for you to follow. This is known as a “safe harbor.” Those parameters are:

For the Relinquished or Old Vacation Property you must have:

Owned the property for at least two years, and;

In each of those two years, the property must have been rented for 14 days or more at fair market rent.

For the Replacement or New Vacation Property

Owned the property for at least two years, and;

In each of those two years, the property must have been rented for 14 days or more at fair market rent.

In addition to these “safe harbor” requirements there are additional requirements:

Your own use of the1031 exchange vacation homes must be no greater than 14 overnights or 10% of the days rented per year, whichever is less, but excluding time spent at the property for repair and maintenance.

The term “safe harbor” means that the IRS will not challenge your 1031 claim of tax deferral if you can prove these facts. The burden of proof is always on the taxpayer. If you 1031 exchange vacation homes and are unable to prove these precise facts your 1031 exchange may still be honored. But it will be subject to greater scrutiny by the IRS. When you do not meet the “safe harbor” test you can still prove investment intent by other facts and circumstances. Some of the best ways to prove investment intent are:

Keep an analysis of the property’s investment potential when you buy it. Market trends and resale potential are important parts of this analysis,

Schedule your vacation home on your tax return under your schedule E,

Take depreciation,

Show income from the property,

Keep track of your personal use time, and remember time spent on repair and maintenance is not counted as personal use time,

Make improvements to the property that will maximize its investment potential,

Do not list the property on schedule A of your tax return.

Show why you sold the property in less than two years makes sense from an investment point of view.

Keep in mind that when advanced planning is possible most taxpayers convert their personal use vacation property to property held primarily for investment under the above stated safe harbor rules prior to per forming a 1031 exchange. A second home can be converted to an investment property, changing the character by placing the property into a rental pool, reducing personal use and itemizing the property on Schedule E on tax return.

Vacation properties held in a 1031 exchange can be converted to a primary home in which case it could qualify for tax exemption under I.R.C. section 121. A second home can be converted to an investment property, changing the character by placing the property into a rental pool, reducing personal use and itemizing the property on Schedule E on tax return.

All of the other requirements of section 1031 exchanges apply to exchanges of vacation homes.


Steven Hickox ESQ


AMT & Disposition of Business Or Rental Property

In our last article we talked about the alternative minimum tax item, resulting from depreciation of business or rental property. A direct corollary of that issue is the AMT item that results from any subsequent sale or other disposition of such property. Critical to minimizing a taxpayer’s AMT is an understanding of the relationship between these two items.

When property is disposed of, a taxpayer calculates the gain or loss based on the difference between the selling price and his tax basis. For something like a stock or a bond, tax basis is the amount originally paid for the investment – that is all that is needed. This same concept also applies to the sale of business or rental property, but with one important difference – depreciation. In the case of depreciable property, tax basis is the amount originally paid, but then reduced for any depreciation taken.

The tax basis of depreciable property changes every year. In the example in the last article, a $10,000 machine was depreciated by taking a $4,000 deduction in the first year, and a $2,400 deduction in the second year. At the end of year 2, therefore, the tax basis of this machine was $3,600 ($10,000 less the $6,400 of total depreciation taken).

What would happen if the machine were sold at this point? The same basic principle of computing the difference between selling price and tax basis applies. Assume, for example, a sales price of $5,000. In this case the taxpayer’s gain would be $1,400, and this amount would be included in taxable income. This is the Regular Tax treatment.

The AMT item arises at the time of sale of property because, in general, a taxpayer uses a different method of depreciation for purposes of the Alternative Minimum Tax than is used for Regular Tax purposes. To the extent the taxpayer has these AMT items from differences in depreciation in prior years, the tax basis of that property similarly is different for the AMT than it is for the Regular Tax. Therefore, gain or loss on a sale of the property also is different. Essentially, the AMT difference in computing the gain or loss is a reversal of the Regular Tax-AMT depreciation differences in the past.

Continuing with the same example, if after two years a taxpayer has been allowed $5,100 in depreciation deductions for the AMT (see the prior article), the machine’s AMT tax basis is $4,900. Assuming a sale for $5,000, taxable gain for AMT purposes would be $100.

This $1,300 difference in taxable gain (the $100 of AMT gain compared to the $1,400 of Regular Tax gain) is an AMT item in the year of sale. This is a favorable adjustment in computing the taxpayer’s Alternative Minimum Tax. It would be entered as a negative number on the Form 6251, making Alternative Minimum Taxable Income $1,300 less than Regular Tax taxable income.

One out of every 14 AMT payers has this item, so it is important that both the Alternative Minimum Tax basis and the Regular Tax basis of depreciable property are properly calculated. Incorrect calculations can have the effect of negating other AMT planning that a taxpayer may have accomplished, costing real tax dollars.


Rental Property Tax – Don’t Leave Money on the Table!

Whether you own one rental property or fifty you should take a hard look at your real estate taxes. And we are not referring to income taxes but rather the rental property taxes. Many people are not aware that you can “appeal” these taxes and save hundreds to thousands of dollars per year, per property (or more).

Of the investors that are aware of the appeal process many assume it would be too cumbersome in both time and research to bother. Others are intimidated by debating their city and would rather stay “under the radar.” Here are a few facts that may make this more interesting for you:

1. It is estimated by industry experts that 65% of all properties are over assessed (both commercial and residential, owner occupied or investment).

2. Less than 2% of all property owner’s appeal their taxes.

3. 70% of the 2% that appeal win some type of rental property reduction.

These stats came from the National Tax Payers Union. The first thing to do, is figure out if your city claims that your property is worth more than it actually is. Don’t let the city’s jargon throw you off with all of their various terms (Many people believe they do this on purpose). That is what this is all about, i.e. is your property worth less than what they report it is, and what the tax it off of?

Rental Property Tax – Assessed Value

Every state and city has an assessed value and an assessment ratio. The ratios vary from state to state and often from town to town. Some city assessment ratio equals the actual market value (their opinion of it) with others; it’s a percentage of the market value. A 2 minute call to your city will determine the answer.

In our home state of Michigan the Assessment Ratio is 50% in every jurisdiction. So, if our city claimed the assessed value of a property is $400,000 that means they think the market value of the property is $800,000 (.5/$400,000).

Say on that same example that we knew three other properties that where similar, that recently sold for $600,000; we would know that the property was being over taxed and would deserve a property tax reduction. The savings on that example would look like this.

$200,000 (over valued amount) x.50 (the assessment ratio of 50%) = $100,000 over assessed $100,000 x.052 (our local millage rate for rental properties) = $5,200 of annual real estate tax savings.

Note this annual saving normally goes on year after year. And if you really learn what you are doing or hire someone that does, you can show an over payment in previous years and potentially qualify for a rebate. For example if you can prove that you over paid $5,000 per year for five years you would technically be owed $25,000 from your city. Also, note that the annual tax savings has an interesting affect on your net operating income, and actually theatrically increases your properties value by getting the reduction on the rental property tax. It’s found money.


The IRS Seeks to Increase Monitoring of Rental Income

One of the IRS’s major taxation groups is individuals with rental income. Small scale rental business is huge in the U.S. and definitely has a significant impact on the taxes collected every year. For this reason, the IRS and other tax authorities keep scrutinizing and reevaluating rental business to ensure that all landlords pay their full dues to Uncle Sam. Some of the recent developments in these areas of rental income are given below:

The Tax Reform Act of 1986

The Tax Reform Act of 1986 was introduced to try and curb the excessive misuse of tax provisions to avoid paying taxes for rental property income. There were many rental properties that made losses continually and used the losses against future revenues. The Act introduced the Passive Activity Loss (PAL) that was losses made from such activity like rental property. The Act placed a limit on the deductions on the amount of loss from rental income. However, as part of the implementation of this ACT of 1986, the IRS has made adjustments to the Form 8582, Passive Activity Loss Limitations, that captures the Reform Act. The adjustments to this form will take effect in the 2011 tax returns and will require individuals with rental losses even from prior years to submit the form with loss details.

Government Accountability Office Report on Rental Income

As part of the efforts taken by tax and government revenue authorities to address diligence in tax collection from rental properties, a review was undertaken by the Government Accountability Office in 2008 on tax returns done by individuals with rental property. The review report revealed that misreporting of rental income in 2001 lead to uncollected taxes of about $12.4 billion. According to the report, more than 50% of all individuals with rental property provided incorrect information that did not adhere to the guidelines of the IRS. The report by the Government Accountability Office drew more attention to incomes from rentals as an area of focus towards reducing the tax gap.

TIGTA Recommendations on Rental Income Tax Scrutiny

Following this report by the Government Accountability Office, the Treasury Inspector General for Tax Administration, an office charged with reviewing the effectiveness of the IRS, took on its own review of the tax on rental income and indeed found that the IRS was not that effective in collecting taxes related to rental income. In its report, TIGTA projected that the IRS would increase taxes by $27.3 million in the next 5 years if they audited more rental property claims and insisted that the IRS pay more attention to rental taxation from here on out.

Expected Increase in IRS Audits

In its recommendations to the IRS, TIGTA suggested July 15, 2013 to be the commencement time for the IRS audit on rental income in a bid to narrow the tax gap based on the loss of taxes through rental income. The TIGTA suggested that the Small Business/Self-Employed Division director of IRS audits be involved in further scrutinizing the rental income returns to find out the tax returns that have erroneous reporting. This will simply result in more IRS audits for small scale rental property returns.

The IRS Responds to the Pressure on Rental Income Taxes

The IRS still remains reserved on a start date on audits for rental property related returns and instead, chooses to address the immediate review of the problem by monitoring the various corrective measures put in place through its internal management controls. The corrective measures for the rental taxes loopholes include the revision on the Form 8582, Passive Activity Loss Limitations and the IRS requiring all the real estate professionals to schedule their net rental income losses and earnings as part of their tax returns for comparison purposes. This is to take effect from the 2011 tax year onwards.

Either way, the scrutinizing of people with incomes from rental property is set to increase in the foreseeable future. This may happen through increased IRS audits or increased internal reviews for people with rental income. Therefore, to remain on the safe side, it is best for every person with rental property to thoroughly understand IRS tax reporting guidelines for rental income and to comply accordingly.


Rental Property Depreciation Report

Every property has some value. The value of the property or asset actually defines how useful the property is and if it can be invested or not. It is important to keep the value of the property known and updated. The process of valuation of a property or asset is done by experts and not by common people. Property valuations are very essential for all owners. The act of estimating the value of a property or real estate is done by licensed professionals.

Property valuers are the highly professional and experienced people that help you in terms of putting a price tag to your property whether it is meant for the commercial, industrial or personal use. Some people also keep properties as investment. So, why do you actually need to value your property? The reason behind people getting help of the valuers is that one can have an estimate about their property and assist you in gaining better investments over it. The valuers can maximize the profit from the sale or rental of the property as well. The property valuers may also carry out compensation assessments, insurance valuations and investment appraisals. If you are not aware of the issues that may influence your property then you might be at risk. A good property valuer will keep you aware as well as advise you on legal and economic factors regarding your property. valuers are not just considered for property valuations they may also prove helpful for many other great deals of transactions as well. Selling, buying or leasing your property can become an easier task when handled by valuers. Trusted and experienced valuers can lower your pressure of maintaining and valuing a property. A lot of considerations have to be taken in account and many risks are involved in the process. To avoid fraud or loss of money or property, valuers give you a safe hand.

Depreciation is also related to the financing of properties. It is either the decrease in value or the allocation of costs to assets. Depreciation occurs on all assets owned by a person. A depreciation report is prepared for keeping records of it. The report must contain a few vital points. A physical inventory of the property should be included in the report. It is very helpful to purchasers, mortgage providers and insurance companies. They must be renewed and updated after regular intervals. A depreciation report is a legislative planning requirement. Depreciation is scheduled annually or after some intervals then it is calculated or updated again by some committee. Depreciation schedules for companies or owners of many valuable assets can be prepared by property groups. They make depreciation reports for commercial or domestic properties which is later referred by authorities to know the depreciation records and history. It is an accounting procedure done by finance teams that record depreciation expenses over a period of time. For more detail visit: