Will house bought for my parents land me with a tax bill?
Q&A: Dominic Coyle
Rental potential: not having received rent means that certain costs cannot be claimed. Photograph: Getty
I bought a house in a Cork town in 1996 for £56,000. I bought the house so my mother could live in it. My father moved into house about 10 years ago and is still living there.
I got work done on this house – costing about €20,000 – for their use. I have never received rent from them and have paid the mortgage. The property was remortgaged in 2006 to get the work done.
My mother died in 2018 and my father is continuing to live in the house. I hope to use this house as holiday home.
I sold a buy-to-let property last year and made a loss of €45,000 on it. Can this loss be offset capital gains on the property in Cork and how do I do this – is it at the time of sale?
I am also planning to do some renovation work when the time comes. I think the property is worth €150,000.
Ms MC, email
Fundamentally, the answer is yes . . . and there are other ways to offset any capital gains tax bills too.
A basic rule of capital gains is that you can offset losses on the sale or other transfer – say by way of a gift – of an investment against profits on investments disposed of in the same year.
If, at the end of the year, the loss, or part of it, remains, it is carried forward until it is offset. Only at that point are you liable again to capital gains tax on asset disposals.
And, yes, this is an investment property. The fact that it was bought for a parent or parents does not matter, nor does the fact that it was never rented as such.
Not having received rent means there were certain costs you could not claim as they are set against rental income. However, you also did not have to worry about filing returns for this property as it was delivering no income.
Ironically, one of your main costs – the €20,000 that you invested to upgrade the home is relevant here as long as it is considered to be “enhancement value” – money that was spent to increase the value of the asset
In your case, this investment goes back a long way – to 1996. That’s before the euro so, to figure what it is worth in “new money”, we divide that sum by the punt/euro converter – 0.787564. So your £56,000 investment property was actually acquired for €71,015 in euro terms.
If it is now worth €150,000, then the €45,000 loss incurred on the sale of your other investment property last year will go a long way to reduce any capital gains tax liability.
But we can go one better. Back in 1996, the capital gains tax regime included the concept of indexation – a multiple laid down by the Revenue which effectively adjusted the purchase price to allow for inflation. It remained in place until 2002 when it was discontinued by then minister for finance Charlie McCreevy.
Depending on whether you bought before April 6th or after – remember the tax year ended in April back then – a indexation factor of 1.277 or 1.251 was applied and this would increase your euro purchase price for the property to €90,801 or €88,952, with the lower figure applying to purchases after April 6th.
You then have your €20,000 upgrade together with any legal and estate agent costs incurred in the acquisition or sale of the property. So, on the basis of your €150,000 valuation, your outstanding loss would be more than enough to wipe out any capital gain on this property.
Of course, you are not selling now and plan, you say, to use it as a holiday home. Assuming property prices continue to rise – especially in resort locations such as the one in which you have this property – once we get through the current virus-triggered downturn, you may have a small capital gain to contend with.
However, that depends on the nature of the work you say you intend to carry out before any sale.
When it comes to that point you simply calculate the gain on the sale – allowing for the costs above – and then offset your outstanding loss to see if any capital gains tax is owing. The details can be filed in your annual return if there is no capital gains tax liability or in a capital gains tax return if there is. Both can be done online through the Revenue’s personal tax myaccount.ie facility.
– 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. No personal correspondence will be entered into.