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Rental Income
by George Farrugia

Rental income from property can be classified under two different income headings, namely:

Trading Income

Where the letting of property, whether furnished or not, is conducted in such a way as to constitute trading this is assessed under Section 4(1)(a)

Investment Income

Where the letting of property, whether furnished or not, is conducted in such a way as to constitute trading this assessed under Section 4(1)(a)

This distinction is important since it will determine what deductions from such income are allowable.

Property

Rental Income when assessing rental income from property, this will include the rental income for the property itself as well as for any furniture and equipment which it contains and which is covered by the same agreement.

Rental Income

This term incorporates;

· Rents (kera)
· Ground rents (cens)
· Alienation fines (laudemia)
· Key money (Regal)

Deductions

As trading income, the deductions allowable under this heading would be all normal trading expenses and capital allowances, incurred in the production of that income.

As investment income, the deductions allowable would be limited to:

· Interest payable on loans incurred for the production of the income
· Further allowance of 20% of the rental income received
· Lm100 by way of allowable audit fee and other administration costs.
· Rent or ground rent
· License fees paid in case of holiday premises
· Any other burden on the property e.g. premium paid, obligation to offer masses   for the soul of the owner, etc


In the case of income from ground rent (cens) the 20% further deduction is not allowable.

The percentage for Further Allowance has to be applied to the net rent, i.e. the gross rent received less all the above allowances but excluding interest payable.

Multiple Properties

Where the taxpayer owns more than one property, each property is treated as a separate tax centre with costs of that property being set off against income from the same property.

Where such costs exceed the income, this will result in NIL income. A loss from one property cannot be set off against profits from another property.

Year Assessable

Income from immoveable property is assessable when it is received, irrespective of whether it is receivable in arrears or in advance. There is no question of apportionment on a time basis, and arrears of rent are not spread back into the years when they fell due.

In practice, however, the taxpayer normally declares rent on an annual basis independently of the actual receipt from such income. In order not to complicate matters, the Revenue normally accepts this method.

When is rental income classified as Trading Income

The factors that are normally considered are:

· The presence of profit seeking motive.
· The nature of the property itself.
· The way the property was acquired. If it was inherited it may be difficult to   infer trading, whilst if it was purchased and rented out   immediately, the trading   concept  would be more acceptable.

· Modifications or alterations to the property. If the owner incurs costs to modify   the property prior to renting, again trading would    be inferred.
· The existence of facilities to promote the income, example sales office, advertising,   etc.
· The number and frequency of transactions
· The existence of trading interest and know-how in the same field
· The method of financing the operations. If the property is acquired on   borrowed  money where the loan has to be repaid out of rental income, the   presumption of   trade would be more acceptable.

Income from property is regulated by the DEDUCTIONS (Expenses in Respect of Immovable Property) Rules 1993 (LN 100/93).

Disclaimer

The above information is being provided as a general guide only and should not be considered as a substitute for professional advice.