Can I save on capital gains tax with a little house upgrade?
An attic extension will qualify as enhancement expenditure, but a paint job will not
You will also need to make sure everything is in writing and that you have full receipts for the enhancement works. Photograph: Getty
Having purchased a house in 1986 and lived there for 10 years until 1996, could I reduce capital gains tax payable if I decide now to do a little upgrade on the property, live there for two years and then sell on?
Ms GD, email
You’ve owned this property for 34 years and appear to be intending to stay another two or three. Of this, you have lived there for 10 years and are considering living there for another two – so let’s say 12 of the 36 years of ownership, as it is a nice easy set of numbers to play with.
First up, you should know that the last year of ownership of this property will be discounted for capital gains purposes anyway – whether you live there or not. This is available to everyone. Effectively, you are considered to be owner-occupier for the final year of ownership – even where you have another property that is your principal private residence.
If you are actually living there up to the sale in the scenario you outline, this is immaterial but it is worth knowing.
So, as it stands, you have lived in the property for one-third of the time you have owned it. On that basis, you will not be taxed on one-third of the gain you make on the property’s sale.
Of course, that means you will be liable for tax at 33 per cent on two-thirds of the gain – minus the €1,270 personal exemption, which is not likely to make a lot of difference.
But what will the gain be? That brings us to the heart of your question.
In simple terms, the gain is the difference between the price you sell the property for and the price originally paid for it.
What you are referring to is enhancement expenditure relief, which is specifically allowed under the capital gains tax regime. The key thing is that the expenditure must enhance the value of the property at the time it is sold.
So a new extension would qualify, whereas a paint job would not. Whether it works depends on your definition of a “little upgrade”.
Is it worth it?
You need to assess if the job of enhancement is worth it in terms of the return on that investment in the sale price. There is no point saving on tax if you are left with a net debt on the enhancement.
You will also need to make sure everything is in writing and that you have full receipts for the enhancement works. Revenue will look for it and challenge any relief in its absence.
That being so, you will be able to deduct this cost from any gain on the sale.
As you acquired the property before 2003, it is also eligible for indexation relief which adjusts upwards the purchase price to account for inflation over the period.
For a property bought in 1986, you multiply the purchase price by either 1.713 or 1.637, depending on whether it was bought before or after April 6th of that year. That new figure is your new base price – that is, the “purchase price” for the purposes of assessing capital gains.
So, if you bought the property for €50,000 in June 1986, your new purchase base price is €81,850 (50,000 x 1.637).
Of course, back in 1986, you’ll have paid pounds for the house, so you’ll need to adjust that to euro to work things out. To do that, you divide the purchase price by 0.787564 . So your £50,000 property translates to €63,487 which, after applying the 1.637 indexation factor, delivers a new base purchase price of €103,928.
Finally, you are entitled to certain other deductions – essentially the costs you incur financially both in buying and selling the property. These would include legal fees, estate agency fees, advertising and so on.
Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or email firstname.lastname@example.org. This column is a reader service and is not intended to replace professional advice. No personal correspondence will be entered into