I am hoping you can assist with a query I have relating to how to estimate the likely CGT [capital gains tax] due on the sale of a rental property that I own. It was originally my principal residence and subsequently became a rental property.
I am a small, single-property landlord and plan to sell the rental house in the coming months as it is no longer an attractive investment (primarily due to increased regulation/RPZ restrictions regarding rent increases) as I approach retirement in a few years’ time.
I am therefore trying to estimate the current value of the property for CGT purposes so that I can estimate my tax liability upon its sale.
I have heard that I am entitled to adjust the original purchase price of the house for inflation during the period of it being my main residence. Is this correct? If so, how do I go about calculating this adjustment or what index should I use to adjust the original purchase price of the property?
The house was bought in 1991 for £54,000. It was rented between 1997 and 2002 while I was working abroad and then from 2005 after I bought a new home. I estimate the property is now worth €400,000.
Any information/guidance would be very helpful and much appreciated as I’m running into dead-ends on this issue everywhere I search.
Mr DH
You are one of the much talked about – and occasionally vilified – small landlords who are said to be leaving the market in recent years.
I’m conscious there are new figures from the Residential Tenancies Board (RTB) earlier this month pointing to a rising number of landlords but even the RTB is talking it down, suggesting the higher figures are as much about the improved way it is collecting the data rather than any actual influx of non-institutional landlords to the private rented sector.
Anyway, regardless of trends, you are heading for the door with a view that the 2 per cent cap on annual rent increase in rent pressure zones (RPZs) and increased regulation no longer make it worth your while to continue in the market. You wouldn’t be the only landlord making that decision, especially as you try to tidy up your affairs in advance of retirement.
So what does it mean for tax? And what is this inflation adjuster?
Well, the inflation adjustment no longer exists – Charlie McCreevy got rid of it back in his time in the Department of Finance. But it is still relevant for people like you who acquired an asset before 2003. The Revenue used to publish a list of capital gains tax multipliers showing the indexation factors which depended on when you bought the asset and when it was sold.
It had nothing to do with the property being your main residence, family home or principal private residence – whatever you care to call it. The multiplier applied to all assets for the purposes of capital gains.
For a property like yours, the relevant multiplier is 1.406 if it was acquired on or after April 6th, and 1.442 if before then.
Your £54,000 home would translate to €68,566. Multiplying that by the 1.406 multiplier would give you an adjusted purchase price of €96,404. So that is now your base purchase price.
You reckon it is now worth €400,000. On that basis, the value has increased by €303,596 but that is not the same as the capital gain.
First you have to determine the portion of your ownership that is accounted for by the time it was rented. This is because a family home is exempt from capital gains tax as long as you are living there. There is a provision to extend that to periods of up to four years when you were not living there because you were working abroad – as you were from 1997 to 2002 – but that presumes the property was otherwise empty.
As you were renting it over those years, there will be no extension of the exemption on that account. However, the last 12 months of ownership is also exempt from capital gains tax regardless of whether the property was occupied by you, empty or rented out. This provision was included to cover people who move homes and have a time lag before they sell their former home.
You have owned the house for more than 33 years and it has been rented out for over 24 of those years. You have helpfully given me the months of various arrivals and departures and that allows me to say that, as of now, you are subject to capital gains tax for 279/401 of your period of ownership – ie, you have owned the home for 401 months of which it has been rented and subject to CGT for 279 months (allowing for the one year exemption in your final year of ownership). That translates at 69.6 per cent.
That is on the basis of selling the home next month. If it is later and the home is rented out for that period, you’ll have to adjust the two figures upward and rework what that means as a percentage.
Taking your €303,596 gain on the basis of the inflation-adjusted purchase price, 69.6 per cent of that figure is €211,303.
Before you assess the tax liability however, you need to discount any costs directly related to the property’s purchase or sale. That would include legal and estate agent costs, for instance, and any costs of advertising the property.
If you carried out major work on the property, such as adding an extension or converting a garage, which is designed to increase the value of the home, the cost of that work can also be discounted. The same does not apply for routine maintenance or cosmetic upgrades, some of which will have been allowed against your rental income.
Discounting them from the €211,303 figure, you are left with your taxable capital gain. One further step: everyone is entitled to a capital gains tax-free exemption in a year of claim of €1,270, so you also deduct that from the balance. Whatever is left is taxed at 33 per cent.
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
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