Q&A: How will buying my sister out of our apartment affect me?

You need to be very clear about where you both stand on this plan

The equity you have in the property certainly counts towards fulfilling your 20 per cent deposit requirement under the new central bank rules. Photograph: Kate Geraghty

The equity you have in the property certainly counts towards fulfilling your 20 per cent deposit requirement under the new central bank rules. Photograph: Kate Geraghty

 

I am planning to “buy out” my sister’s interest in our residential apartment which we purchased jointly in 2003. We estimate that we have equity in the region of €160,000-€170,000 in the property after our joint mortgage is repaid.

No liability for capital gains tax is expected.

I understand from my bank that I will need to take out a new mortgage to purchase the property on my own. The level of mortgage required – the same amount as the joint mortgage that we currently pay – is within the income limits imposed by the Central Bank, ie 3.5 times my salary.

But the bank says I will need to be gifted the amount of equity that my sister currently has in the property – estimated at €80,000-€85,000. She is quite willing to do this. But will her gift be taxable for me?

Also, would my own equity in the property (€80,000-€85,000) go towards the 20 per cent deposit needed under the current Central Bank rules for mortgages? I would appreciate your advice or views on these issues, please.

Ms V O’D, by email

Okay, so you have a property that is currently worth the outstanding mortgage plus about €170,000, and you own the property 50/50 and you are looking to buy out your sister.

You have no capital gains tax liability presumably because it is, for both of you, you main home or, in Revenue parlance, your “principal private residence”.

Depending on the nature of your ownership agreement, it is most likely that each of you independently owns half the property. That would mean that your sister has liability for half the current outstanding mortgage, but it also means that she owns half the value of the property.

In those circumstances, if you are buying her out, you are presumably assuming responsibility for the mortgage debt – either via the existing mortgage or, more likely, a new mortgage. In addition, you would owe her half of the equity in the property – the amount it is worth over and above the outstanding mortgage.

You say this is between €160,000 and €170,000, so your bank is correct when it says that either you pay her this amount or she effectively gifts it to you.

The two of you need to be very clear about where you both stand on this as such transactions can lead to incredibly fractious disputes, even between good friends and family, or later beneficiaries. Normally, in a buyout, the “seller” would expect to get the full value from their portion of the property – ie your sister would expect to be paid the €80,000-€85,000.

What you seem to be saying is that your sister is happy for you to assume responsibility for the mortgage and to enjoy the full benefit of any surplus in value of the property over that figure. If that is the case, and she is financially comfortable enough to “write off” the €85,000, well and good, but you will certainly need that in writing.

Assuming it is the case, and this is, in essence, a gift from her to you, your lender is correct that you would need to make provision for it as you would have a personal tax liability.

Sisters, and other siblings, are allowed to “gift” each other €30,150. This is a lifetime figure and so includes any other gifts you may have received from your sister or other siblings and other “linear relatives” (uncles/aunts, grandparents etc) since December 5th, 1991. It also includes inheritances from any of those people in that time.

You are also entitled to discount the first €3,000 of any gifts in any year from any relative – so you only tot up gifts from linear relations over and above the €3,000 threshold in your calculation.

If you have received no gift or inheritance from a “linear” relation to date, your sister’s gift of €85,000 exceeds the threshold by €54,850. At a tax rate of 33 per cent, after the €3,000 small gift exemption, you would owe Revenue €17,110 in capital acquisitions tax on this gift and would have to make a Revenue return and payment.

If you have already received gifts or inheritances from other relatives in the category bringing you close to or over the €30,150 threshold, you could be facing a bill of up to €27,060.

One option to avoid this – though it would require careful paperwork – is that your sister retains ownership of whatever portion of the property her share of the current equity equates to. So, if the value of the property is €340,000 (for simplicity’s sake) and her share of the equity is €85,000, she would retain 25 per cent ownership.

It might make things a little messier with the banks and, if she is looking for a clean exit, it would clearly complicate that. However, if her intention is that you enjoy ownership of the house by taking over full responsibility for the mortgage, it might at least avoid an immediate tax charge – and she could gift you €3,000 of the value on a phased basis over future years. It’s not ideal but it is an option, depending on what the intention of the two of you is in this transaction.

On a more positive note, the equity you have in the property certainly counts towards fulfilling your 20 per cent deposit requirement under the new central bank rules. Taking the example above, your equity would equate to a 25 per cent stake in a property with a market value of €340,000, well above the Central Bank threshold.

Send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara St, D2, or email dcoyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice.

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