Foreign exchange and capital losses on property sale
Q&A: Dominic Coyle answers your personal finance questions”
As a general rule, you are not allowed do anything to artificially inflate a capital loss. Photograph: Nick Bradshaw
Back in 2006, when the exchange rate was about 68p to the euro, I purchased an apartment in Manchester with a sterling mortgage for £141,750. The 10 per cent deposit of £14,175 cost me €20,851 at exchange rate of €1.471 to the pound.
In January 2018, I sold the property for £109,250 making a loss of £32,500. Can I take account of the the exchange rate to increase my euro loss for CGT purpose here. The £32,500 loss at the conversion rate of €1.106 to the pound in January 2018 is €35,945.
Going back to the deposit of £14,175 at Jan 2018 exchange rate of €1.106 gives a figure of €15,678, giving me a loss of €5,173 on the deposit alone. I hope you can understand my query.
Mr D O’S, email
I think you’re trying to be too clever here, and in the process, you are actually doing yourself a disservice in terms of your tax position.
You are looking to apply the January 2018 euro/sterling exchange rate to a mortgage deposit paid in 2006 – the logic being that the weaker euro/sterling exchange rate in 2018 will magnify your loss. The simple answer is no, you cannot.
In fact, as a general rule, you are not allowed do anything to artificially inflate a capital loss.
But, as I see it, in this case, you don’t need to. In fact, your calculations as laid out above are actually doing you out of money.
You are working out your loss based simple on translating the 2018 sterling loss into euro at the exchange rate prevailing in January of last year. Given the loss in sterling terms between the purchase and sale price was £32,500, you assess your loss at €35,945.
But that’s the wrong way of looking at it.
You bought the property in 2006. At that time, the £141,750 you acquired it for translated to euro at €208,514 given the rate you quote for the euro/sterling exchange rate at that time. That was the value of the asset at the time and the price you paid for it in terms of calculating the deposit and arranging finance to cover the balance.
In 2018, you sold the property for £109,250. In euro terms, at the January 2018 exchange rate you quote, that amounts to €120,830.
Capital gains (or losses) are assessed as the difference between the purchase price and the sale price. If it is a gain, there are offsets you can use depending on allowable expense incurred – such as legal and estate agency fees etc. In the case of a loss, as mentioned above, you cannot avail of such expenses to widen the loss.
So, in euro terms – which are the terms that applied to your investment from the outset – your loss on this property deal is €87,683, the difference between the euro rate that applied at purchase and at the point of sale. That’s more than twice the capital loss you have calculated . . . and without resorting to any funny back-accounting with the original deposit.
So, in this case, the euro rate is working in your favour. If it had worked against you, reducing your allowable loss, that would just have been your bad luck. Such is the risk of buying assets where foreign exchange is an additional risk.
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