Will Revenue believe I made no gain on investment apartment?

Q&A: Dominic Coyle

The rules on capital gains exempt a principal private residence – i.e. your main home – from consideration. Photograph: Kate Geraghty

The rules on capital gains exempt a principal private residence – i.e. your main home – from consideration. Photograph: Kate Geraghty

 

I purchased an apartment in 2016 and lived in it as my principal private residence for one year. During that year it increased in value by about €50,000.

I then moved house to a new principal private residence elsewhere and rented out the apartment (at which point the apartment became an investment property) for the next two years, during which the value remained exactly the same.

My question is: if I sell today, do I pay €0 capital gains tax on the basis that the “investment” period didn’t reap any gain...?

Or do Revenue (lazily) just take the €50,000 overall gain and apportion it (i.e. €50 ÷ 3yrs x 33% CGT) and charge me €5.5k?

Mr P.L., email

Lucky you. The rules on capital gains exempt a principal private residence – i.e. your main home – from consideration. In other words, any profit you make on the family home is free of capital gains.

Once it becomes an investment property, it becomes subject to capital gains tax. All that is crystal clear as you lay it out.

So what happens when it comes to sorting out what capital gains tax, if any, is due?

As you suspect, the Revenue takes a look at the valuation of the property on purchase or when you otherwise came into ownership of it and the price at which it is sold.

It then works pro-rata. So if you owned the house for three years, as in this case, and it was an investment property for two of those years, it will determine that two-thirds of the gain in the capital value of the property came during its period as an investment property.

However, it is not quite as simple as that. Revenue then discounts for capital gains tax purposes the final year of ownership. In other words, regardless of whether the property is rented out or not in this period, Revenue will assume for tax purposes that it was owner-occupied.

In your particular circumstances, this means that the Revenue will attribute just one-third of the gain in the value of the property as an investment gain so you will pay 33 per cent tax on a third of the €50,000 gain. That means a tax bill of €5,555.

Of course, you’re entitled to deduct costs incurred in buying and selling the property before you calculate the tax bill. With legal and estate agent costs generally amounting to in excess of €1,00 each on both ends of the deal, that will easily knock €5,000 off the overall gain.

Any allowable expenditure you put into maintain or improve the property would also be set against a gain. You also deduct the annual capital gains tax exemption of €1,270 that each of us is entitled to.

That leaves you with an overall gain of just above €43,000 and a tax bill of about €4,750. You’ll need to work out the precise figure once you pull together any receipts for costs and allowable expenses.

Lazy? No, I think that’s unfair. The Revenue assesses gains and losses in exactly the same way. If you had made all the gains in years two and three, you’d have benefitted in this case.

Anyway, even if Revenue did operate as you would prefer, you’d still have some persuading to do in the current market to convince Revenue that a property made a substantial €50,000 gain three years ago and nothing since.

I think the way they manage it is more straightforward and certainly easier to operate – both for the Revenue and the taxpayer.

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.

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