Exactly what expenses can you set against capital gains before tax?

I am looking for some advice on how to calculate how much we might owe in capital gains tax on an upcoming property sale. I am finding it difficult to find comprehensive advice on what the rules are (what can be deducted, what cannot, etc).

For example, I was recently informed that the cost of staging a home can be deducted, which seems odd as I have been told deductions must increase the capital value of the property.

We lived in the property from the time we purchased it in 1998 to 2006, then we rented it out from September 2006 when we moved to a new home.

It was purchased in 1998 for £63,000 punts, and remortgaged several times. We expect to sell the property for €200,000

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We will have spent approximately €3,000 on some renovations – paint, carpets, garden, kitchen, bathroom. We do have records of expenses in the period 2006 to 2021 spent on renovations to the property to the value of €5,000. Are any of these deductible?

We both declare our profit on the rental annually to Revenue.

Ms K.C., email

The legislation covering capital gains goes back to 1975 so you’d expect it should be easy to get fairly precise guidance on what is allowed by way of exemptions and what is not. Unfortunately, it seems that this is not the case.

First things first, the value of the property and the initial capital gains tax bill before allowable expenses. This is an area we’ve covered a few times recently so I don’t intend to dally too long on it.

The £63,000 purchase price in euro terms (divide by 0.787564) is €79,993. As it was bought before 2003, there is some allowance for the impact of inflation up to that date. How much precisely depends on when in 1998 you bought it but, if before Aril 6th, it will bring the "purchase cost" up to €98,551: if after that date, it will be €96,951.

As the property is now worth around €200,000, you’re looking at a headline gain of just over €100,000 and a capital gains tax bill before allowable deductions of around €34,000.

You mention several remortgages but these are irrelevant to capital gains. What counts is the initial purchase price (adjusted for inflation where allowed) and the sale price.

Allowable expenses

So what about the allowance expenses? For this, the best starting point is to go back to the legislation, the Taxes Consolidation Act 1997 (TCA 1997), which, on the issue of allowable expenses, essentially transposed the provisions of the Capital Gains Tax Act 1975.

I’m not going to quote it word for word as it goes on a bit but you can look it up online if you want the full precise wording. What you are looking for is section 552 (1) and (2) of TCA 1997.

Essentially there are three areas of allowable deductions from your capital gain. These are:

– the “incidental costs” incurred by you when buying the property;

– expenditure incurred “for the purpose of enhancing the value of the asset”;

– any cost to you of proving or defending your title to the property;

– any “incidental costs” incurred by you in selling the property.

So, no, it is not just expenditure that increases the capital value of the property despite what you had been told previously.

I'm going to leave the third one lie as it is now an issue here. On the second one – enhancement expenditure – this covers capital expenditure in upgrading the property such as building an extension, putting in new windows or similar things. With an eye to the future, it will cover the substantial cost we all look like we are going to face to retrofit our properties under climate change goals.

An upgraded kitchen or bathroom would be allowable if it is seen as adding to the value of the house, not just preserving it. But it doesn’t cover stuff like painting or carpets that you also mention in your question. These will have been allowable against your rent at the time and I assume they were claimed then.

And yes, you will need receipts, in case the Revenue Commissioners come looking for them.

That brings us to incidental costs in the buying and selling of the home. Section 552 (2) makes an attempt to define these as "expenditure wholly and exclusively incurred by that person for the purposes of the acquisition or, as the case may be, the disposal, being fees, commission or remuneration paid for the professional services of any surveyor, valuer, auctioneer, accountant, agent or legal advisor and costs of transfer or conveyance (including stamp duty), together with (a) in the case of the acquisition of an asset, costs of advertising to find a seller, and (b) in the case of a disposal, costs of advertising to find a buyer and costs reasonably incurred in making any valuation or apportionment required for the purposes of the computation under this chapter of the gain, including in particular expenses reasonably incurred in ascertaining market value where required by the Capital Gains Tax Acts."

Some of that is fairly clear. So estate agent fees – including any marketing of the property or advertising – is covered along with legal, accounting or valuation fees you may have had to pay.

Interpretation

After that, you’re down to a matter of interpretation. The test, I would argue, is whether you would face that bill if you weren’t selling the property. In my view, I think you could very reasonably argue that you would never have incurred the cost of staging the home unless it was for the purposes of selling it and that the cost is therefore “wholly and exclusively incurred” for the disposal of the property.

It is clearly not specified in the legislation – I’m not sure how many people in 1975, or 1997 even were “staging” their homes for sale in anything but the most informal use of the term – but the terms of the law do seem to cover it comfortably.

That’s the thing with legislation. Precise wording can only get you so far: after that it is down to interpretation.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or email dcoyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice. No personal correspondence will be entered into