Elderly mum has two properties in negative equity

I am trying to help my elderly mother relocate to be nearer me. She has two properties. One is her main residence, bought in 2005 for €485,000. It’s a two-bed apartment and was recently valued at €265,000.

The second property was and is let out. Bought around 2004 for €310,000, it’s a one-bed in Galway and is now valued at €165,000.

My mother has no mortgage on them but both are in negative equity. We need to sell either one, or both, to buy her a bungalow with no stairs for around €450,000.

Is she liable for capital gains on the rented one even though it’s in negative equity? And does her need to buy a house for her changing health needs affect any tax charge?

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Can we get tax relief if we sell our house at a loss?

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Ms T.G., UK

Well your mother certainly seems to have been caught out by the market. She is considerably under water in terms of the current value of both her own home and her investment property compared to what she paid for them back when the Celtic Tiger was in full swing.

And, while so much of the commentary about housing and negative equity is focused on Dublin, her experience shows the scale of the chaos wrought by the financial crash in other parts of the State – including areas that have not had the pent-up housing demand of the capital and therefore less chance to recover the ground lost on property prices in the crash.

The good news, in relative terms, is that she has no mortgage on either property so that – apart from swallowing fairly significant losses – there is no impediment to her simply selling up at the market rate and moving closer to you and to a property that would be more suitable to her now, given the changing health needs to which you refer.

But what about a tax liability on that investment property? As you say, it has been, and is currently, rented out. That means that it does ostensibly come under the auspices of the capital gains tax (CGT) regime.

However, CGT is designed only to tax profits made during one’s ownership of an asset, and in this case no such profit exists. No profit = no tax calculation. Your mother can sell the investment property without any concern about CGT.

Furthermore, assuming she sells at the valuation you quote, she will then have capital losses of €145,000 – the shortfall between the original purchase price of €310,000 and the current valuation of €165,000.

The issue of costs incurred in buying and selling don’t come into it as you cannot use normally allowable expenses to widen a loss.

If your mother has sold any other assets this year as part of a planned move, and made a profit on them above the annual CGT exemption of €1,270, she can offset any such gain against the loss she makes on the investment property – assuming she sells it this year.

If she doesn’t use up the entire €145,000, or whatever the final figure ends up being, she carries the loss forward to offset against any future capital gain. In other words, your mother will not have to pay capital gains on any profitable asset sale in the future until any loss she incurs on the investment property is used up.

Unfortunately, the same does not apply to her own home. There is a CGT exemption on any profit made from the sale of your main family home. That’s fine in the normal course of events but the corollary of the property being exempt from capital gains is that you cannot recover any losses made on its sale. So, if your mum, sells the family home now at the €220,000 loss on the basis of the valuation you cite, then that is unrecoverable. She simply writes it off.

Thus, if she only needs to sell one property to facilitate this move, it makes sense to sell the investment property and to hold on to – and possibly rent out – her current home after she moves closer to you.

With Galway being a bustling university town, it should be a strong rental proposition and that might cover the cost of any other financing needed for the new home... at least until property prices improve sufficiently to consider selling it.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or email dcoyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice.