Interest Relief in Respect of Rental Property

The deductions which can be made in computing Case V rental income are set out in Section 97(2) TCA, 1997. They include at paragraph (e) of that provision ‘interest on borrowed money employed in the purchase, improvement or repair of the premises‘. Revenue has been asked about the deductibility of interest under Section 97(2) in circumstances where the borrowed money is used to purchase shares in a company which owns a rental premises or which purchases such a premises. This article sets out the Revenue view.

As just indicated, interest is deductible under Section 97(2) where the money borrowed is used, inter alia, to purchase a rental premises. However, the borrowed money must be used or employed directly in the purchase of that premises. Where a premises is acquired indirectly through a company using borrowed money, the money borrowed will have been used to purchase an interest in the company and will not have been employed in the purchase of the premises. The position is not altered by the fact that -

• the investor’s borrowed money is subsequently used by the company to purchase the premises, or
• the investor may be able to receive rental income directly from the tenants of the premises, or
• the investor may be able to sell the premises by selling his or her underlying shares in the company.

The position just outlined applies equally where the borrowed money is used to purchase an interest in any other type of entity such as a property-owning trust.

The same treatment also applies for money borrowed for use in the improvement or repair of a premises. Relief is only available where such money is employed directly in the improvement or repair of the premises.

The provisions of Section 97(2) also apply to the purchase of foreign premises. Although rental income from foreign property is assessed as Case III rather than Case V, Section 71(4) TCA, 1997 applies Section 97(2)(e) TCA, 1997 to foreign rental income and provides the same deduction for interest on borrowed money as that allowed in computing Irish Case V rental income. Therefore, the position outlined in this article in relation to the use of borrowed money has equal application in the case of foreign rental properties.