I am selling my family home. It was rented for one year. I have lived in it for four years.
It was only rented as the tenant was overholding and I had to go to court to get him out. Can you please advise me on how I calculate the capital gains tax on my property?
Ms A.W.
Capital gains tax is one of the less tricky Irish taxes to get your head around but your situation is somewhat complicated by this tenant issue.
In general, you pay capital gains on the difference between the price you sell something for and the price you paid for it initially. You are allowed to claim “directly relevant expenses”. In the case of a property, these would include any legal and estate agency costs involved in both the purchase and the sale that left you out of pocket.
People who have held assets for a long time – since before 2003 – can also adjust the purchase price by a multiple set down by the Revenue Commissioners to allow for the impact of inflation on the asset they are selling.
Obviously, in your case that doesn’t apply as you only have this property for five years. However, you do benefit from possibly the most significant of capital gains tax exemptions under which a property used as a principal private residence – a family home – is exempt from capital gains tax liability.
However, the occupation by this tenant does complicate things.
In the normal course of events, any period of ownership during which your property was not your principal private residence but, rather, an investment, is excluded from the exemption. And when you sell an asset with such mixed use, you are required to work out pro rata for how much of your term of ownership the property was your home and how much was accounted for by its use as a rental property.
On the basis of what you say, that would seem fairly clear: you have owned this home for five years, of which the overstaying tenant was in occupation for a year – so 20 per cent of the period of ownership.
That means you will have to assess a fifth of any profit on the sale of the property as capital gains.
But what about your tenancy situation? You bought this home in good faith with a tenant who was under properly notified instruction to quit. They simply did not do so.
You had always intended this property to be your home from the outset, not a rental property. Can you be held accountable for the actions of the tenant in refusing to vacate the premises? As it is, you have already, presumably, incurred unexpected costs in having to go to court to get them to leave the property eventually.
This was not something I had come across before. Overholding is not that unusual these days – not least as tenants struggle to find alternative accommodation – but what is unusual is that it would become a factor for a new owner. In general, the seller is stuck with the property while the overholding is addressed as no one wants to buy a property with that sort of headache attached.
I understand in this case that you were concerned you might lose out on the property if you had not closed the deal when you did. Given that you are moving on after just five years, I am not sure that you would not have been better advised to pass on the complication but we are where we are.
I asked Revenue whether there would be any allowance made for the fact that you were only effectively running an investment property due to factors beyond your control. Their advice is clear, if not very comforting from your point of view.
“There is no provision within section 604 TCA 1997 to deem the first year of the individuals’ ownership of the property as a period of occupation for the purposes of PPR relief in these circumstances.
“As such, the individuals will have 80 per cent of the chargeable gain arising on the disposal of the property relieved by virtue of PPR relief; the remaining 20 per cent of the chargeable gain will be subject to CGT in the normal manner,” Revenue tells me.
Section 604 of the Taxes Consolidation Act (TCA) 1997 is the piece of the capital gains tax law dealing with the disposal of a principal private residence (PPR).
The bottom line is that, having made the decision to go ahead and buy the property even though the tenant was still in situ, you are liable for capital gains on the proportion of your period of ownership when he was in occupation.
Ironically, if his occupation was in your last year of ownership rather than the first, it would have been ignored as the final 12 months of ownership is considered under capital gains tax law to be a period of owner occupation regardless of the reality.
One other thing to note. When it comes to capital gains, you cannot be too fast and loose on time. If this gent was in occupation for 48 weeks or 62 weeks, you will need to work out the family home to rental ratio precisely by those terms not just rounding up or down to a year.
Finally, as you probably know, you are entitled to make a gain of €1,270 in any year of sale before becoming liable to capital gains tax. So, after you work out how much of the profit on the sale of your home is accounted for by this tenant’s occupation, ignore the first €1,270.
The balance will be taxed at 33 per cent and, if you sell the home before the end of November, any tax due must be paid by December 15th. If you sell in December, the bill falls due at the end of the next month – January of the following year. You also need to file a tax return but you have until the end of October of the year following any sale to do that.
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
