Making sense of capital gains tax on home rented out for few years

Q&A: You can only allow for inflation if you bought the property before 2003

I was trying to calculate the tax liability on our house which we recently sold in Dublin. It was joint property which was bought in 2004. It cost us €389,000 with all expenses, currency charges etc as we moved from UK after selling our UK house.

As per your advice, if we multiply the inflation of 1.277 then its price goes to €496,547. The house was sold for €466,000. It was our primary residence until 2015, then rented until October 2021.

We paid about €11,000 agent and solicitor fees and refurbishment costs of over €15,000.

I am now over 60 years of age too — does this make any difference? What I can get from a previous article of yours is that our capital gain is for 18 years but we shall pay CGT for 18/5 of this.

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Also we get tax-free allowance of €1,270 each. When I do all this, rather only putting in the inflation difference we are in loss.

Are you an accountant?

Mr FI, email

* Capital gains is a reasonably straightforward tax. It charges you tax at the rate of 33 per cent on the “profit” you make on the sale of an asset. The rate can change, and has done in the past. A future government, or a future budget by the current government, can adjust the rate again.

However, things can get a little more complex when you rent out a home that you have lived in as a family for some time.

The rules governing how capital gains is assessed can also be adjusted from time to time and it appears that one of these areas might have caught you out here in your assessment of tax in your situation.

You cite an indexation factor of 1.277 to allow from the impact of inflation from a previous piece I have written. There was indeed provision to index upwards the original purchase price of assets to allow for the impact of inflation but it does not apply to your case as this relief was ended by former minister for finance Charlie McCreevy from the start of 2003, a full year or more before you acquired your Irish home.

The 1.277 multiple that you mention would have applied on an asset that was acquired between April 6th, 1995, and April 5th, 1996, and sold in 2003 or more recently. The figure changes depending on when you bought the asset before 2003 and when you sold it. It is still relevant for people who bought property or other assets before the end of 2002 and have yet to sell them.

But, as you bought in 2004, it is not something that will affect your tax position.

In terms of determining your precise tax bill you will also need to note when exactly in 2004 you bought this home, when in 2015 you started renting it out and precisely when it was sold this year. Capital gains does not round up years, so it is not as simple as saying that because it was bought sometime in 2004 and rented in 2015, it was your principal private residence for those 11 year. It could have been bought in November 2004 and rented out from January 2015, for example.

Main home

What is true is that you are not liable for capital gains tax for any proportion of the time you own the house during which it is your main home or principal private residence. You are also not liable for capital gains tax for the final 12 months of ownership — regardless of whether the property is let for some or all of that 12-month period.

This is relevant to you as you were renting the property up to last October.

In ballpark figures, you bought 18 years ago and have rented out the place for over six years of that time — or just over one-third. It could be slightly more or less depending on the dates I mentioned above which you’ll need to have to hand.

You’ve sold it for €466,000 and bought it for €389,000, so that’s a gross gain of €77,000.

But we haven’t allowed for the expenses that you mention.

Costs incurred in the purchase and sale of the property can be deducted before assessing any gain. The selling costs are deducted from the sale price and any purchase costs added to the purchase price back in 2004. You mention a figure of €11,000. I am not sure if that’s an amalgam of buying and selling expenses — as clearly you would have had legal fees on both ends of the deal — but you will need to break them down and allocate them appropriately.

It won’t make a major difference to the sums but that is the way it is properly done. That makes the assessable gain €66,000.

But what about the refurbishment costs? Well that depends.

‘Enhancement expenditure’

You are entitled to deduct what is called “enhancement expenditure”, which is defined as expenditure that increases the value of the asset, from any capital gain. So, for instance, if your refurbishment involved adding an extension or otherwise enhancing the building, it is allowable,

However, if refurbishment is simply painting, plastering and repairs, for instance, then it is not allowable, although you should have been able to claim it off your rental income which you will have had to declare since 2015.

In your case, if the €15,000 refurb costs are allowable they are added to the purchase cost which would bring the gain down to €51,000. On that basis, and using our rough assessment that one-third of your gain is liable to capital gains due to the time the property was rented out, you would have a capital gain liability of around €17,000.

If, on the other hand, as I suspect, that the refurbishment costs are not an allowance, you have a taxable capital gain of about €22,000 — the precise figure, as I keep repeating, depends on the precise dates.

Each liable person has a once-off €1,270 allowance against capital gains so that could knock a further €2,540 off the bill in your case, leaving you with a taxable gain of just under €19,500 and a tax bill — at the rate of 33 per cent — of just over €6,500 (or €14,500 and around €4,800 if the refurbishment costs are allowed).

There is no allowance made for the fact that you are over the age of 60.

And, for clarity, on your final point, no, I am not an accountant. I am a journalist who has written in this area for a number of years but I have no training in accountancy.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street Dublin 2, or by email to dominic.coyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice

* This article was edited on Monday, August 8th, 2022 to clarify how expenses should be allocated.