My daughter bought a town house in Cork in 2019, while she was living abroad. She rented it out from September 2019 to August 2023 when she and her husband returned to live and work in Ireland.
They added a bedroom to the town house and have lived in it since then. They have now bought another house and have sold the town house. Can you advise if they are liable for capital gains tax and, if so, how is it calculated.
Ms CM
The first and most important element of the answer is yes, they will be liable to capital gains tax. Sorting out how much is where it gets a bit trickier but not much.
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Your daughter is one of many who chose – or were obliged – to head off for a number of years to establish their careers and, for many, raise the funds to get on the housing ladder. In her case, she chose to invest in a property well before she came home, renting it out in the meantime to help with mortgage payments and upkeep.
The basic rule on capital gains is that you are liable to tax on the difference between what you pay for an asset and the amount you receive for it when you subsequently sell it. But, as always with tax, there are caveats to that basic rule.
From your daughter’s point of view, the most relevant is an exemption that applies to a person’s principal private residence. No capital gains is due on a property that is used as your family home.
However, in your daughter’s case, this is not so clear cut. While it may well have been the only property she owned at the time, she clearly was not living in it all the time as she was abroad for several years.
If it had lain unused during that time, she might not have had an issue but the fact that it was rented for four years will inevitably impact on her tax position.
[ Filling out tax forms and sorting allowable expenses on capital gainsOpens in new window ]
There are two other main reliefs against capital gains tax. The first is expenses incurred in buying and selling the property – things like legal, estate agent, advertising, valuing and other costs, such as obtaining a BER.
The second, which is also relevant here, is money that is spent to add value to the property. Adding an extra bedroom – whether through an extension or reallocating existing space – clearly will add value to the property.
You don’t say when the property was acquired but, assuming it was in September 2019 just before it was rented, and that she has sold it this month, she will have owned it for six years and five months or thereabouts – say, 77 months.
Of that time, it was rented for four years – or 48 months.
If we look at the CSO figures, house prices in general in that area went up by €100,000 between September 2019 and November last year, the most recent figures available.
So, picking figures out of the air, let’s say she spent €300,000 buying this town house back then and sold it now for €400,000. In that time, we’ll assume the extension/conversion cost her €35,000 and that between the costs of buying the house and selling it, she spent the guts of €20,000 on professional fees.
Her paper “profit” is €100,000. Allowing for the exemptions brings that back to €45,000.
At that point, she has to divide that figure between the time she used the house as her family home and the time it was rented out. On the basis of the figures we’ve already used above, you divide the €45,000 by 77 (the total period of ownership) and multiply the result by 48 (the number of months for which it was rented).
And that gives you a figure of €28,052. This is the capital gain related to the time the property was rented and thus forms the capital gains tax liability.
Everyone is entitled to a make a capital gain in a year of up to €1,270 free of tax. It’s a weird figure, you might think, and that is simply down to the fact that it was IR£1,000 in pre-euro days and was simply converted at that time. It hasn’t changed since, which says something in itself.
That leaves a taxable gain of €26,782 which, when taxed at 33 per cent, will leave her with a tax bill of €8,838.
Clearly, she will need to substitute her actual figures for when the house was bought and at what price and then the cost of adding the extra bedroom and her purchase and sale professional fees but you can see how it is done.
There was a separate capital gains exemption for a time on the purchase and sale of homes that she or you may have heard about but that was limited to properties that were bought between December 7th, 2011 and the end of 2014 as the government of the day tried to kick-start the market in the middle of the housing crash. As she bought in 2019, it will not apply.
You say she has now sold the town house since the start of this year. On that basis, she will have to pay the tax owing by December 15th. She will also need to file a tax return by October 31st next year on this transaction. If she files a regular income tax return, the details can be included on that; otherwise, she will need to file a CG1 capital gains tax return.
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 with a contact phone number. This column is a reader service and is not intended to replace professional advice.
