What tax do I owe on a rental property I bought in 1987?
Brace yourself: there will be a fairly sizeable capital gains tax bill on this property
Modernisation would generally be allowed against capital gains but, in the absence of receipts, I think you’ll find it hard to persuade Revenue. Photograph: iStock
I purchased a house in 1987 for IR£27,500 and lived in it myself until 1992. I then rented it until last year and the sale has been finalised this week for €325,000. The costs associated with purchase were IR£500 and the sale costs were €6,000. I assume any modernisation over the years is not allowed without receipts?
Could you estimate the capital gains tax payable?
Mr BF, email
There will be a fairly sizeable capital gains tax bill on this property as it was rented out for most of the period of your ownership.
First the figures: up to 2002 you were entitled to apply an indexation factor to the purchase price to reflect the impact of inflation. Depending on when in 1987 you bought the property – before or after the April 6th start of the next tax year, as applied in those days, the indexation factor would be 1.637 (up to early April) or 1.583 (if acquired later in the year).
That would increase the purchase price of your property to between £43,532 and £45,017. You’d clearly need to be precise in your tax liability calculation. If you divide whichever of the two above figures is relevant by 0.787564, you will get the precise conversion of your purchase price.
Taking £45,000 for convenience for the purposes of this example, that would convert to a purchase price of €57,138. Deducted from the sale price of €325,000, that leaves a “gain” of €267,862.
From this you deduct the purchase and selling costs – €6,635 once you convert the original purchase costs using the same conversion multiple above – to leave a gain of €261,227.
But you’re not done yet. Capital gains applies only to the period in which the property was an investment property – from 1992 to 2018 – and the final year of ownership is deemed to be owner occupation, whether it was or wasn’t.
Again, it depends on when precisely in 1992 you started renting it out but, for ease of calculation, let’s assume you owned the property for 32 full years and used it as your home for six full years – from 1987 to 1992 inclusive. So for six of the 32 years, it was owner occupied. Including the final-year exemption, that means it was owner occupied for 7/32nds of the time you owned it and rented for 25/32nds.
Twenty-five/32nds is 78.125 per cent of the period you owned this property for and 78.125 of the €261,227 gain is €204,083. That’s your CGT exposure and the tax at 33 per cent would be €68,027. That’s the ballpark figure. As I say, you’ll need to be precise in your own calculations.
Modernisation, or enhancement of the property, would generally be allowed against capital gains but, in the absence of receipts, I think you’ll find it hard to persuade Revenue.
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