What expenses can I claim against capital gains when I sell a property?

I purchased a semi-detached house in August 2004 for €210,000 and sold it in September 2021 for €265,000. After paying the outstanding mortgage, a net amount of about €120,000 was credited into my account via my solicitor .

The expenses I submitted to my accountant did not include significant amounts – over €10,000 – that I spent on the property in the few years after 2004. This was spent on changing the kitchen, bathroom, electrical connections etc which were not included in my earlier submitted list of expenses.

Capital gains tax was calculated to be €4,435 and I paid that amount to the Revenue within the stipulated time even though it was a bit of a rush. The reason I did not submit those lump sum expenses was because I lost those receipts from such a long time ago.

I subsequently asked my bank for all the statements dating back to 2004/ 2005 and now have them in my possession. I am in a position to submit them. Can I can submit these expenses during submission of my income tax return for 2021/22 and claim them against my income tax payable for the above year ?

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I used the property as my principal residence from August 2004 until 2012, then permanently moved to a neighbouring county in 2013 where I have resided since. How many years would that be regarded as, eight or nine – ie will 2004 be taken into account or not?

If it is okay to submit those expenses with the return this year, will the bank statements suffice or will the Revenue still be looking for the receipts from 15-odd years ago ?

Lastly, you explained about the effect of inflation on the actual cost price to be taken into account in order to bring down the amount of capital gains tax payable . If so, what would be the cost price of my property due to the effect of inflation as on September 2021 that should realistically go towards the calculations, and could that be applied now in my income tax return for 2021-22 if it was not considered earlier while calculating the CGT?

Dr A.M., email

There’s a lot here but the fundamental questions are: what can you claim against capital gains tax? And what do you need in order to do so?

Essentially there are only two categories of expense that you can deduct from a capital gain. The first is expenses incurred directly in buying and selling the property – such as estate agent and legal fees. These, from your figures, appear to have been allowed for.

The only other category of expense allowed is “enhancement expenditure”. This is spending that adds value to the asset and is different to maintenance costs which are not allowed against capital gains but would have been allowed against any rental income you had at the time.

If you bought a house to rent and upgraded the kitchen in a fundamental way, it would probably be allowable as enhancement expenditure. However, it appears here that the enhancement happened shortly after 2004 and the property was not rented until 2013, so Revenue may query it. The same goes for the bathroom upgrade. I'm even less certain about the "electrical connections".

Receipts

But – and here's the crunch – the Revenue Commissioners will expect you to have kept receipts for any such work. And a bank statement does not in itself qualify as a receipt. Revenue does not request receipts as a matter of routine with any claim but they can come looking for them. And especially here, where you are going back on a capital gains tax self-assessment already made and paid, it would not be a surprise that they would want to see evidence of the spending.

However, if the statement is specific enough in whom the monies were paid to, it might be worth your while to resubmit a capital gains self-assessment to seek a refund of some of the monies paid. I’m not very confident it will work but you have nothing to lose as the money is already paid.

In any case, whatever is allowed against capital gains is ring-fenced into that category. Revenue will not entertain you now claiming capital gains tax enhancement expenditure against your income tax. They are two separate tax headings and not interchangeable.

You can claim maintenance costs against rental income under income tax and if you have not done so – and if they occurred in the four years before this tax year – you would be able to claim them still. There is a four-year look back limit on claims so, in 2022, you would only be able to claim for spending incurred in 2018 or later.

Capital gains is applicable only on the period of ownership during which the property was not your family home – principal private residence – minus the last 12 months of ownership.

In your case, you made a profit of €55,000 on the sale of this property which you owned for 205 months. It was your home for 113 months (when you include the final 12 months which automatically count as owner occupation). That means it was rented out – or was a second property, assuming you bought a property when you moved county – for 45 per cent of the time you owned it.

If you didn’t buy a property in your new location but rented there – and did not rent this property out for a while – the proportion would be even lower as it would still have been your only or main home.

With a gain of €55,000 and a capital gains tax bill of €4,435, it appears your account claimed just over €8,900 in expenses, which would suggest nothing obvious was missed in the claiming of buying/selling expenses anyway.

Indexing

On your other question, the inflation indexing to which you refer increases the purchase price of the house to a new "base cost" price, but this applies only up until the end of 2002 when it was discontinued. As you bought your home in 2004, it doesn't apply.

Finally, it doesn’t apply to you, but for people who bought a property between December 7th, 2011 and the end of 2014 and held on to it for seven years (or, from 2018 on, for four years), no capital gains is payable. This was an incentive introduced by the then government to try to kickstart the property market after the financial crash. It seems ironic now as the market needs anything but kickstarting, but it does show what government can do when they make up their mind to help out certain sectors.

If you hold it for more than seven years, the pro rata method of calculating taxable gains comes into play – just like for a property that was a home for a while before being rented out.

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