Back in the 1990s, then Treasury Secretary Ruairi Quinn came up with an ingenious plan. He had a real problem with landlords because almost none of them paid taxes.
ack then in the cities and Dublin in particular, it was a market with a strong pre-63 content.
Old historic buildings had been internally divided into labyrinths of sleeping quarters. Often a Victorian two-story building above the basement contained eight separate sleeping quarters, many of which shared bathrooms with other tenants.
The business model of the typical flatland landlord was to take a building and cram as many people in as possible by breaking it down into tiny sleeping quarters. It’s a model that’s being revived today by big funds that are commissioning whole new blocks of small, bed-and-living-style homes that they now call “studios.”
But back to Ruairi Quinn. Far more people evaded taxes in the pre-Tiger days; especially self-employed. People were talking about the “nixer” economy. Landlords were among the worst and the vast majority of them were unregistered.
Curiously, the groups these landlords represented often publicly protested the state’s efforts to get their members into the tax net.
Treasury inspectors and investigators trying to put a stop to this mass tax evasion became ragged and rang buildings with stacks of doorbells. Trying to catch tenants leaving or catching the guy with the big bunch of keys coming in. In general, the landlord did not live on-site, and most tenants were unwilling to deal with strangers stepping out in front of them as they left their buildings.
There hadn’t been a major crackdown, possibly because there was a large tranche of Gardai among the landlords of single-family homes, as well as politicians from certain parties making tax-free hay. Even today, hard-working politicians can somehow forget to register their rental properties.
Quinn, an MP from a party with not that many landlord connections (then) had a plan. In the household he gave renters a state rent refund of a few pounds a week. It was framed as a small gesture to help them. All they had to do was apply by mail — including their full name and address, the name and address of their landlord, and a list of how much they pay in rent.
While some landlords immediately saw what was going on, for most it took a little while for the penny to drop. Some didn’t realize it until agents from the IRS showed up at their door. The smarter ones haggled with their tenants. “If you don’t ask for it, I’ll pay you myself. Otherwise I guess I’ll have to sell it. There’s no point in rocking the boat.”
Although no figures were subsequently released, it is widely believed that Ruairi Quinn’s Peppercorn rent payment scheme served to trap hundreds, if not thousands, of tax-evading landlords, many of whom faced huge back taxes, some of whom had taxes left behind in their beds for decades.
Further complaints from the landlord representatives made it clear that the initiative had brought much success and money, all a result of this cheesy gift to the tenants, which in the end was paid many times over by the enormous revenues that resulted.
There are echoes of Ruairi Quinn’s “cunning plan” in this week’s budget with Paschal Donohue’s peppercorn payment to tenants of €500 tax refund a year. It’s not enough to make a big difference for tenants. It is about a third to a fifth of the amount that an average rent in Ireland has already increased in 12 months. However, it is enough to make the effort to apply for it. And submit all those juicy landlord details along the way.
Because unregistered landlords are by their very nature unregistered, there are no really reliable estimates of how many there might be left in the state today. Five years ago, the Residential Tenancies Board (RTB) estimated it could be 15,000.
Due to ups and downs in the real estate market and a change in the nature of the properties being rented, the profile of these illegal landlords has changed.
Gone is the middle-aged silver cropped duffle coat guy; a battered wine-colored Opel station wagon and a jailer’s ringed keychain hanging from his belt. It’s now far too difficult for more serious mid-market landlords with more than a couple of properties to dodge the tax. They are almost exclusively registered.
In fact, many of today’s unregistered landlords are most likely reticent. By that I mean the younger folks who were buying new homes in Celtic Tiger times and soon found themselves in negative equity and unable to sell them while their tiny homes fell in value to 35 percent or 40 percent of the price , which they paid for it.
But life goes on. So they got married, started families and soon found they needed more space. Their only option was to rent out their apartment and rent a larger house themselves. At that point, they might have thought charging rent and not paying taxes was a passing gasp. So they stuck their heads in the sand. Even those who bought a home didn’t want to sell their former home with negative equity, so would likely rent it out. Either way, whether you’re renting another home or paying a mortgage, it’s almost impossible to balance those numbers while paying full tax on the rent that’s coming in for the other.
Only now are reluctant landlords’ rents beginning to come out of negative equity. And those who rented illegally for 10 or 15 years now have a big fat pile of ripe cherries for the tax office to pluck. If they were all caught in one fell swoop, back taxes per landlord would certainly run into the tens, if not hundreds, of thousands.
Real estate experts I spoke to believe the €500 rent relief means there will now be no place for tax evaders to hide. Even those tenants who have played along with the capers will find it hard to resist a €1,000 grant early next year (it’s retroactive, so grants for 2022 and 2023 will be billed together).
If 10,000 landlords are caught and each pays 50,000 euros (not outlandish for back taxes over 10 or 15 years along with hefty fines), that’s a whopping 500 million euros in the pocket for the tax office, whose officials just have to sit back and wait for those hefty ones Landlord details to get to them.
However, there is one major downside. Landing on the tax net would no doubt cause those caught to evict and sell their tenants because they likely wouldn’t have the cash to pay back taxes and fines. This would further reduce the supply of rental properties and cause them to join the exodus of landlords from the rental market.
According to recent data from the DNG network, 23 per cent of sales in Dublin are now due to exiting landlords. The figure for the rest of the country is even higher at 30 percent.
To put it in perspective as I write this, there are only 885 total properties listed for rent across the country. About a third are in Dublin – only a few hundred. In contrast, there are over 15,000 Irish Airbnb rentals available.
When it comes to taxes, the law is the law. But in very practical terms, would the windfall now being raked in be worth the very real cost of the housing crisis? Or would it be better for the IRS to carefully archive all the landlord details that they will soon receive, for retrieval at a time in the future when we are not having such a serious famine in rental property availability?
And maybe let those thick, low-hanging fruits ripen for a while longer?
https://www.independent.ie/life/home-garden/tax-dodging-landlords-become-low-hanging-fruit-42027969.html Tax-evading landlords become low-hanging fruit