Q&A

Please send your queries to Dominic Coyle, Q&A, The Irish Times, D'Olier Street, Dublin 2 or e-mail to dcoyle@irish-times.ie. This column is a reader service and is not intended to replace professional advice. Due to the volume of mail, there may be a delay in answering queries. All suitable queries will be answered through the columns of the newspaper. No personal correspondence will be entered into.

Capital gains

Last September I purchased a second house. I still have my original house, in which I have lived for four years. I understand that I have no capital gains to pay on my original house, as it was my principal private residence, and that I have one year to sell it. Thereafter I do have to pay capital gains tax as a function of the time it stopped being my primary residence. My question is: If I don't sell in the first year, when does the calculation period for capital gains tax begin? Does it begin in September 2000, meaning that if I keep it for four more years (to 2004), the tax will be 20 per cent on 4/8ths? Or does the clock start in September 2001, meaning that, if I sell in 2004, the tax would be 20 per cent on 3/8ths?

Mr P.B., e-mail

If you do not sell the house within the year, capital gains will be assessed from the date it stopped being your principal private residence - in your case, September 2000. As you can imagine, the Revenue would be wary of allowing a loophole that people could use simply to reduce any eventual capital gains tax liability. The measure to which you refer is simply a means to ensure people have a reasonable amount of time to settle their affairs.

You do also need to be aware that, in the post-Bacon climate, you could face further tax bills, under legislation designed to deter property speculation, if the authorities determine after the one-year grace period that you own two properties. As the recently acquired property is now your principal private residence, the tax would be levied on the market value of your former home.

US stocks

In reference to your piece last week about the woman relocating to Ireland from US with a stock and retirement portfolio, if she cashed in her stocks before returning, wouldn't she be liable for CGT in US only? You seemed to only address her retirement portfolio?

Mr J., e-mail

Certainly, if the stock is sold prior to any move from the US, jurisdiction does not arise and the individual will face capital gains only in the US.

If the stock is sold subsequent to her arriving here, it would be taxed under Irish capital gains legislation, presuming she is resident in the Republic for tax purposes.

Housing

My fiancee and I purchased a one-bedroom apartment in the city centre for £98,500 just over two years ago. Our outstanding mortgage is approximately £84,000, and the apartment has appreciated substantially in value. While we haven't had it professionally evaluated, I imagine we'd easily get £140,000 for it. We'd like to buy a larger place - perhaps a two- or three-bedroom house. Are we better off selling the apartment, or keeping it and renting it out? If we do sell it, can we use the difference between the sale price and the mortgage as the deposit on a house, or would we need to have the deposit in advance of the sale?

Ms S.McQ, e-mail

There are a couple of entirely separate queries here but ones that are of interest to many people considering moving up the property ladder right now.

It is impossible to give a cut-and-dried answer to the first one. Basically, it depends on how much you need the money the sale of the apartment will generate to secure the house you seek. You have a property that is worth considerably more than the mortgage on it. If you plan on using your existing lender, it is quite possible they will look favourably on the surplus when assessing your new mortgage application. Of course, the fact that the property is worth more than you have it mortgaged for does not guarantee your ability to meet repayments on a higher or separate mortgage, but it will give the lender some comfort that it can recoup its loan if things turn sour, by forcing a sale of the property.

While there is strong demand for rental property in Dublin right now, most agents will tell you that you should not reckon on immediate returns from the exercise. You should ask a letting agent for advice on the costs involved in letting the apartment. While Bacon III and the subsequent second Finance Act last year do impose penalties on people owning more than one property, this can be circumvented by landlords who properly register their interest and meet standards laid down in the Housing (Miscellaneous Provisions) Act 1992. If you fall outside these provisions, you will be hit with an anti-speculator's tax of 2 per cent a year for the first three years on the market value of the apartment, once it is no longer your principal private residence. You might also face a stamp duty bill.

The second question has me somewhat confused. If you do sell the apartment, any money over and above your mortgage liability is yours to do with what you will. From the wording of the letter, it sounds as though the surplus is the key to moving up the property ladder, but it can still be used in different ways. It can be put against the new property as a deposit or used to reduce the amount of any new mortgage on that property. You need to produce a deposit when you have a bid accepted on any new home. If that happens before you sell your current apartment, then you would need to find the money for a deposit at that time. However, in today's competitive market, I imagine your current lender would allow you to draw down the deposit on the new house against the surplus between the mortgage and market value of the apartment to ensure your continued business. If not, maybe you should look at moving your borrowings to a more flexible lender.

Renting rooms

I'd like to take advantage of the new Rent-a-Room scheme that has been introduced in the recent Budget. The average rent for a room in my area is £380 a month. If I rent out one of my rooms, I will be able to earn the entire £4,560 rent tax free. However, I would like to rent out two rooms, which would push the rental income above £6,000. Would I, therefore, have to pay tax at the marginal rate on the entire rental income, or does the scheme's limit still apply to the first £6,000 of rental income earned?

Mr C.P., e-mail

The scheme allows for rent free from income tax of up to £6,000 a year. In your case, therefore, you would be paying tax at your marginal rate only on any amount of rent you receive on the rooms in excess of £6,000, provided that you are living in the house as your principal private residence.