Landlords and IRS: Changes in Assessment

By Advertiser, in Business · 25-06-2015 14:34:00 · 0 Comments

Part 1 (This is the first in a 2-part series)

The IRS Reform law has brought substantial changes on taxation of rental income for landlords. The following highlights punctuate the principal modifications in the law. In fact, the premise for allowable relief from assessment has been brought into line with the principles and practices of other member states throughout the European Union.

Category F - New basis for deductible expenses
If you choose to be taxed under category F, the income from rents, net of allowances, will normally be subject to IRS at a separate rate of 28%. Most necessary expenses incurred in conducting the activity not just maintenance and repairs as before are now deductible. This means that the agent’s costs are now covered. Note that expenses for building contents (furniture, household articles, comfort or decoration) are not eligible.
Landlords can choose to be taxed by Category B (as business income)
Until now, when calculating income tax, landlords could only declare the proceeds from long term letting of property in Category F (rental income). With the “IRS” Reform in the 2015 Budget, landlords are now able to declare as a business and be taxed according to the rules of Category B (Sole Trader business income).
The legislation provides that, in either case, the basis for assessment is identical: rental income is only taxable on net income after subtracting allowable overheads. In other words, landlords have the option to deduct all expenses essential to the exercise of the activity to determine their net income and apply the Category B tax rates.

Keep in mind that beyond income tax under IRS, “business” income from Category B is also subject to VAT when it exceeds €10,000 per annum. Category F remains VAT exempt.
What then is the advantage of opting for taxation of Category B or Category F? Proceeds from the Category B can be aggregated with other sources of income and taxed at marginal rates while rental income taxed under Category F is assessed at the flat rate of 28%. It is up to each individual to choose which method proves more advantageous.
An important note: If landlords prefer to be taxed under category B, they must submit an “Início de Actividade” (Declaration of Opening of Business) with Finanças where they should opt for the Simplified Regime. If gross annual income exceeds €200,000, they are required to switch to standard accounting practices.
Aggregation: new options
Many categories of income may be taxed in one of two ways: autonomous assessment - taxed separately at a flat rate independent from other sources of income (such as bank interest), or aggregate assessment - all forms of income are added together and then taxed at marginal rates (according to the tax tables). In the past, when one option was selected, it had to be applied to all forms of income. Starting in 2015, the most appropriate form of declaration may be selected for each category of income. They no longer have to be the same.
Bank declaration no longer required
Anyone with rental income in IRS no longer needs a bank declaration regarding income obtained from capital as was required in the past. This measure already applies in the 2015 tax return in respect of 2014 income.
Next: Part 2: Deducting losses and new red tape

Dennis Swing Greene is Chairman and International Fiscal Consultant for euroFINESCOs.a.


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