Out of pocket on property investments but will I be taxed?

I bought an apartment in 1987 which I still live in. In 2000, I bought a holiday home for €90,000 on which I spent about €70,000 on renovations. During the Celtic Tiger, I bought an apartment for €230,000 which is rented.

I want to sell the holiday home and the apartment now. As the apartment is now worth only €140k and the holiday home is worth about €150k. Where do I stand on capital gains. I will be losing a lot of money on one sale while gaining a little on the other.

Ms N.O’S., email

It sounds like you are definitely going to be out of pocket on these transactions. The big issue is the apartment that you acquired in the Celtic Tiger years and it is illustrative of the reality for many people that even now – 12 years after the crash – some property values never recovered to their pre-crash level.

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The only good bit of news is that this will play to your advantage in terms of assessing your liability to capital gains.

Both these properties are considered investment properties, even though you may never have rented the holiday home to anyone. The importance of that is that both are liable in full to capital gains tax. But only where there has been a gain.

So where do we stand with these two properties?

Well, the Celtic Tiger apartment is pretty straightforward. You bought it for €230,000, you reckon it will sell for around €140,000. Assuming that proves to be the case, you are nursing a loss of €90,000 on this investment.

The holiday home is a little more interesting. You paid €90,000 for it back in 2000 and estimate that you will sell it for a sum in the region of €150,000. So, on the surface, you have made a gain on this asset of around €60,000.

However, back in 2000, you were allowed to apply what was called an indexation factor to the purchase price of this property to reflect the corrosive impact of inflation on the value of the asset.

This was the case up until the end of 2002, when it was discontinued by then finance minister Charlie McCreevy.

However, as long as you bought the property before the end of 2002, you get some benefit. In your case, the purchase price of the holiday home is adjusted to either €102,960 or €107,370 – depending on whether you bought it before April 6th that year (the higher sum) or later.

One important issue to which we will return is that you cannot use an indexation multiple either to turn a capital gain into a loss or to increase the loss on an asset.

Then there is the money you spent on the property. This may or may not help, depending on what "renovations" were involved. The Revenue Commissioners allow enhancement expenditure to be offset against capital gains. To qualify, the expenditure must enhance the value of the asset and that enhancement must still be in place when you sell – i.e. if you extended the property then knocked down the extension to build a sunroom, you couldn't claim for the original extension, as I understand it.

Applying this to your holiday home, the initial purchase price of €90,000 and the estimated sale price of €150,000 means a capital gain of €60,000.

If all the €70,000 in renovation expenses is allowed as enhancement expenditure, that €60,000 gains suddenly becomes a €10,000 loss. In that event, inflation indexation is not relevant.

If only some of the €70,000 is allowable, as is more likely, then your capital gain comes down from the €60,000 towards nil.

If you still have a gain, you go back and recalculate using the higher inflation-indexed price to assess your liability. Remember indexation cannot turn a gain into a loss.

At worst, even if none of the renovation expenditure can be considered “enhancement expenditure”, your €60,000 gain will reduce to somewhere between €42,630 and €47,040 on the basis of indexation depending on when in 2000 you bought the holiday home.

So where do you stand on capital gains? You will, as you say, certainly be losing money on one of these properties and you may even be losing on the other at the end of the day.

Assuming both are sold the same year, your €90,000 loss on the Celtic Tiger apartment means you will have no tax to pay. Any gain on the holiday home will be deducted from the loss on the apartment, leaving you with a net loss.

If you sell the holiday home first and it yields a capital gain, you will face a tax liability on that gain. You can deduct a personal capital gains tax exemption of €1,270 off any gain and the balance is taxed at 33 per cent.

The problem here is that you cannot go backwards with capital losses to wipe out gains from earlier years. If the lossmaking apartment is sold in a subsequent calendar year, it will not cancel out the bill on the earlier sale of the apartment.

However, if the holiday home is sold in the same year or in a subsequent year to the apartment, the loss on the apartment can be used to offset any gain arising.

A capital loss does not expire. You hold on to it and carry it forward until such time as you have made sufficient capital gains on the sale of other assets to fully offset it. This can be quite useful.

In this case, any gain on the holiday home depends on the nature of the renovation. However, if you make sure to sell both properties in the same year – or certainly to sell the apartment first – you will face no bill for capital gains.

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. No personal correspondence will be entered into.