How would you like to earn up to €10,000 a year completely tax free? Not only is it possible but it doesn’t involve a dubious pyramid scheme or taking a second job. Under the Revenue Commissioners’ rent-a-room scheme, anyone who rents out a room in their property can earn up to €833.33 tax free from their tenant each month.

However, as rental supply now exceeds demand in most parts of Ireland, rents have fallen rapidly in the past year. The year-on-year decline in rents, according to Daft.ie, accelerated from 3.2 per cent last autumn to 13 per cent in January 2009. That said, anyone renting a double room in Dublin, for example, can expect to receive between €350 (for a basic room in a less-popular area) and €700 (for an en-suite double in a luxury property).

If you want to rent out two rooms, you can do so and still claim the relief. However, it is extremely important to make sure you keep the total rental income under the threshold if you want it to remain tax free. “If you receive a cent more than €10,000, you’re liable to income tax on the lot,” says Linda Gallagher, joint managing director of First Ireland Risk Management, an independent financial adviser.

The scheme is a win-win situation for both landlord and tenant, as tenants can also claim rent relief on the money they pay you. The tax relief also applies to any self-contained unit within a property, such as a granny flat, but it cannot be claimed if you are renting to your son or daughter.

While the prospect of tax-free money is appealing, Liam D Ferguson of Ferguson & Associates, a multiagency intermediary (financial adviser), says that it is mainly young people, who are already used to sharing rented properties, who avail of the scheme.

“I haven’t seen that much interest in the rent-a-room scheme among the over-55s, now or in the past. Although it would make a lot of sense to earn some tax-free income that doesn’t involve brown envelopes, I think the prospect of sharing your home with a stranger gets less appealing as you get older,” he says.

Over time, however, more and more people are realising the value of tax-free rental income from a spare room. Between 2002 and 2005 (the last year for which figures are available), the number of people claiming the rent-a-room tax relief almost doubled, from 1,440 to 2,820, according to Revenue.

If you are considering renting out a room under the scheme, it’s important to know that such a rental arrangement is not covered by the usual tenancy agreements and you would not have to register as a landlord with the Private Residential Tenancies Board. Therefore, it’s important to draw up an agreement covering rent, deposit, a notice period, rules regarding visitors and noise, and so on. This should be signed by you and your tenant.

Remember, this income may affect any means-tested Social Welfare payments you receive, although it does not have any bearing on a non-contributory State pension. Furthermore, although the income is not taxed, you will still have to declare it to Revenue in an annual tax return.