Property tax, a possible restriction on short-term lets, not to mind the potential impact on homeowners’ capital gains tax exemption ... is the new modular homes scheme as good as some make it out to be?Thus far, there has been a mixed response to the Government’s latest initiative to help alleviate the housing crisis – allowing homeowners to build modular homes in their back gardens without planning permission and earn a tax free income from it. Some argue it is a useful tool in helping ease the shortage of rental accommodation; others fear it could give rise to “shedsits”, or low quality rental stock. There is still much that remains uncertain about the new scheme. While the full regulations have yet to be finalised, it is expected that rent-a-room relief will apply to earnings from such homes, which entitles people to earn up to €14,000 a year tax free. But what about other aspects, such as using such properties for short-term lets, or charging your children rent to live in the modular unit. Will these be allowed? Here we take a look at the sums, whether or not it might make sense for homeowners and what type of rentals are likely to be excluded given how rent-a-room relief operates. Rent-a-room offers tax relief on rental income from eligible lettings. It is one of the few remaining ways to earn a tax-free income in Ireland. To qualify, the room/unit being let must be in a residential property that is occupied by an individual “as their sole or main residence during the tax year”. You don’t have to own the property to qualify for the relief – though you will need to clear it with your landlord if you are renting – but the unit that rent-a-room is being claimed for must be part of the main property. [ Owners of back-garden modular homes face second local property tax charge, says RevenueOpens in new window ]This covers a self-contained flat or converted garage attached to the home for instance but if either of these are adjacent, but not attached, they cannot qualify. The new modular home exemption, therefore, marks a significant change in policy as it will mean that unattached units that previously did not qualify will now do so.Back in 2008, the relief available was capped at €10,000, but it was increased in January 2017 to its current level of €14,000. Given that is almost 10 years ago, there could be an argument for increasing it further in Budget 2027 this October. The numbers availing of the relief have steadily increased in recent years. In 2015, only about 6,500 applicants availed of it. That climbed to 10,730 by 2021 and reached a new high of 16,580 for 2023, the latest year for which figures are available. According to Revenue figures, the scheme is costing the exchequer €42 million, up from almost €7 million in 2015. Interestingly, however, average income has been steady since 2021.[ ‘Beds in sheds’: Will looser planning rules on garden homes lead to shoddier housing?Opens in new window ]How much does a modular unit cost?This will depend on the quality of the unit. Home Ireland, for example, has a two-bed modular home available for €75,000, or turnkey with groundworks for €119,800. There are many providers offering homes for less than €50,000, albeit of a lower spec. How much can I earn?While the sky might be the limit when bringing a new property to the letting market, it won’t make sense to charge record rents if you are hoping to avail of tax relief.The new modular homes scheme is expected to fall under rent-a-room relief, which allows homeowners to earn up to €14,000 a year from renting a room in their property without paying any tax – be it income tax, PRSI or USC - on it. But earn a single euro above that threshold and all the rent will be subject to tax at your marginal rate.At the upper limit, a modular unit could be let for a maximum rent of €1,166 a month though, of course, rent should depend on location, quality of unit and so on.If you charge €1,200 a month and end up earning €14,400 over the full calendar year, you will fall outside rent a room relief and may end up paying over as much as €7,500 of your annual rental income in taxes. Can I charge extra for meals or laundry?Some homeowners might seek to increase the amount they can earn under the rent-a-room relief by charging their tenants extra for services such as laundry or meals. However, that is expressly banned under the terms of the relief. As Revenue notes of rent-a-room: “Any amounts arising for meals, cleaning, laundry or other similar goods and services that are incidentally provided in connection with the residential use are also taken into account [when determining if the relief applies].”[ Property industry experts weigh in on back-garden modular homes – from tax to potential incomeOpens in new window ]Can I do short-term lets?For some, the appeal of a modular home might be to let it out while you’re away on holidays, or for occasional nights to guests to boost your household income.This is not possible under the rules of the rent-a-room relief, apart from student-type arrangements – including weekday-only “digs” – and thus may not apply to the new modular home scheme.According to Revenue, the relief doesn’t apply where letting periods “do not exceed 28 consecutive days”.“This is an anti-avoidance measure which puts beyond doubt that the relief does not apply to short-term tourist accommodation based on home sharing, including where it is provided through online booking sites,” according to a Revenue document.Can my son or daughter move in?Another potential use would be for an adult child to move into the home, paying rent to their parents. Such a move would help the parents pay for the cost of the unit, as well as giving their children some independence at a level of rent that could be significantly cheaper than market rents. It might also mean the child could apply for rent tax credit of up to €1,000 a year as this is possible for rent-a-room type arrangements.However, unless they are amended, the rules are likely to make this impossible. Under the existing rules of the rent-a-room relief, you cannot claim the relief for payments from immediate family members, such as a child to their parent, or a child to their parent’s spouse or civil partner.It could be useful, however, if accommodating extended family members, such as a niece or nephew.In addition, the tenant is not eligible to claim the rent tax credit, where they, and the landlord, are related.Will letting out a modular home impact my CGT allowance?Thanks to principal private residence (PPR) relief, when you sell your family home, you are not liable to capital gains tax (CGT) on it regardless of any gain in value, as long as it is not sold for development and the garden is under a size that would certainly qualify all urban home and even more rural ones. This is a significant benefit, given that if you paid €40,000 for your home in 1990 and it is now worth €900,000, you would otherwise face a tax bill of some €283,800 if you sold it.So could you lose this relief by renting out a modular home on your property? Under the rent-a-room relief, providing all the conditions are met, it doesn’t affect your exemption.When asked about what the position is likely to be with modular homes, however, a spokesman for Revenue said it was a matter for the Department of Finance – which, in turn, said that the Minister for Finance would not comment on tax matters before the budget. So it looks like we will have to wait a while for clarity. Other tax issues?As reported in this paper last week, modular units will be subject to local property tax. In Dún Laoghaire Rathdown, this would mean an annual bill of €80, or €109 in Co Galway.And while a typical landlord can offset expenses incurred in letting a property against their tax bill – such as letting fees, and upgrades – as no tax applies on rent-a-room income, there is no such benefit on this front. You should also note that while you may not owe any tax if you qualify for rent-a-room relief, you are obliged to report it to Revenue, either through ROS (Revenue Online Services) or MyAccount.Is it worth it?This will obviously depend on how much you spend on the unit, the amount of rent you can charge and the length of time you wish to let the unit out for.Consider a unit bought for €50,000. If you make the full amount of €14,000 each year, you will have covered your costs and will turn a profit after 3½ years.If, however, you pay double that, or €100,000 for the unit, it will take you more than seven years of full occupancy to make your money back – and there will be wear and tear over this period. Based on income of €14,000 a year, it does, however, represent an attractive yield of 14 per cent – tax free. If you already have such a unit in your garden, rent-a-room could offer a decent income more or less straight away. Will I be bound by tenancy rules?At present, garden dwellings that are rented out are subject to the Residential Tenancies Act and should be registered with the Residential Tenancies Board (RTB) at a cost of €40 a year.However, it is expected that modular units in this new scheme will be exempt from these requirements under new Planning Exemption Regulations, which the Government has yet to pass. This ties in with rent-a-room relief. According to a spokeswoman from the RTB, such arrangements “are not a residential tenancy under the Residential Tenancies Act”, and so no registration is required. This also means that rules on security of tenure, minimum notice periods and tenancy duration do not apply to these rental arrangements, and they are also not covered by the RTB’s dispute resolution service.