‘I’m selling my rental properties. Can I offset repairs I made over the years against tax?’
Property clinic: Costs may be regarded as enhancement expenditure allowable for CGT
Do Revenue accept that work would have to be done on a house over 44 years and allow for this?
I purchased a house in 1974 and it has been rented continuously since. During that period I have carried out numerous renovations on the house, ie rewired it, installed central heating, replaced the bathroom and kitchen, put on a new roof, did some internal insulation and other small jobs, eg replacing internal doors etc. None of these improvements were allowable against rental income for tax purposes. I now intend to sell the house along with several others that I own due to excessive regulation of the rental business. Unfortunately, I do not have receipts for this work as it was done more than seven years ago.
Do I have any chance of offsetting these repairs against a large capital gain? Do Revenue accept that work would have to be done on a house over 44 years and allow for this?
Capital expenditure incurred on additions, alterations, repairs or improvements to the premises, unless allowable under an incentive scheme or incurred on fixtures and fittings, is normally inadmissible as a deduction from rental income under Case V of Schedule D.
However, such expenditure may be regarded as enhancement expenditure which is an allowable expenditure for Capital Gains Tax (CGT) as defined under section 552 of the Taxes Consolidated Act (TCA) 1997. This section effectively defines enhancement expenditure as additional costs wholly and exclusively incurred on the asset, after the date of acquisition, which adds value to the property and is reflected in the state and nature of the asset at the date of sale. However, it does not include routine maintenance such as painting.
It is important to note that to qualify as a deduction for enhancement expenditure, the sole test of allowability is whether the purpose in incurring the expenditure was to enhance the value of the asset. Also, the expenditure must not have proved futile or have wasted away before the disposal of the property. For example, during the period of ownership, a tennis court was installed and subsequently removed and replaced with a swimming pool. While the cost of the swimming pool should be an allowable deduction for CGT purposes, the cost of installing the tennis court is not allowable as it was not reflected in the state of the land on its disposal.
Strictly, in order to claim a deduction, all relevant supporting documentation confirming the amounts of enhancement expenditure claimed should be available. If this is not available, Revenue are likely to challenge the deduction for the expense. A successful challenge from Revenue will result in unpaid taxes which will also be subject to interest and penalties.
However, if the work completed is clearly reflected in the current state of the property (eg an extension) and it is evident that an additional expense was incurred, we would suggest you discuss with your tax adviser whether a basis may exist to claim a deduction for these costs.
Susan Blake is tax manager with RSM Ireland