Getting out from under ‘never-ending’ Celtic Tiger debt burden
Q&A: Dominic Coyle
I am considering selling my home at a profit of €300,000 then paying off the mortgage on the apartment plus the management fees, and then selling the apartment for a possible €230,000, using this profit to buy a small house. Photograph: Yui Mok
I am a single person and I have two properties – my home that I live in and a duplex apartment that I have rented out.
I have an outstanding mortgage of €190,000 on my home and it is valued at €500,000. The rental property I bought in 2006. I paid €409,000 for it and I have an outstanding mortgage of €291,000. It is currently valued at €230,000. I also have unpaid management fees of over €10,000 on the apartment. The mortgage on the apartment is currently “interest only”.
I need to make drastic change in my life as I feel I am in a never-ending cycle of debt.
I am considering selling my home first at a profit of €300,000 then paying off the mortgage on the apartment plus the management fees, and then selling the apartment for a possible €230,000, using this profit to buy a small house. Do I have to pay any capital gains tax on the sale of the apartment when I sell it?
Mr KM, email
You are not alone in feeling buckled under the continuing debt fallout from the collapse of the Celtic Tiger. Many investment properties were still being snapped up both at home and abroad by people back in 2006 before the reality of the financial crash hit.
You are fortunate in that, despite the crash in property value, you have been able to keep your head above water and manage your two outstanding mortgages.
However, there is clearly a heavy burden. You note that the mortgage on the investment property is interest only – ie none of the underlying borrowings are being paid off – and you add that you have a five-figure sum of arrears with the management company responsible for the complex in which that duplex sits.
This has obviously been an ongoing stress for some time as those management fees built up and I can certainly understand your desire to sort it out once and for all.
In simple tax terms, the news is good.
You estimate that you will make a good profit on the sale of your family home, about €300,000, but this will not attract any tax as the family home is exempt from capital gains.
As far as the investment property is concerned, there is no gain to tax. You bought it for €409,000 and seem to think you will do well to sell it for €230,000. No gain, no capital gains tax. In fact, there is a €179,000 loss on the investment and you can use that to set against any profits you make selling other assets at a gain this year.
If you do not offset the full €179,000 loss this year, it carries forward until it has all been offset against future gains.
Fortunately, the profit from the sale of your own home will meet the full outstanding mortgage of €291,000 and the outstanding management fees, which is good because it means you don’t have to go cap in hand to strike a deal with lenders.
It also means, apart from the €230,000 net profits on the transactions to fund a new, smaller home, you have a clean-“ish” record with the bank – allowing for the switch to interest-only and the fact that your management fee debt might hit your credit rating for a while – and you should be in a position to secure at least a small mortgage for that future property purchase.
Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or email email@example.com. This column is a reader service and is not intended to replace professional advice.