Making sense of tax during last year of property ownership

I am selling a rental property that I bought in 2006 and lived in for a number of years before renting it out. There is no CGT [capital gains tax] as it is worth less than I originally paid.

My query relates to the final year that I rent out the property. You advised that the final year of ownership is deemed owner-occupied regardless of whether it is rented or vacant.

If I sell my property this year, does this mean there is no tax liability on the rental income when I do my tax returns for 2022?

Ms E.K., email

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The piece on working out capital gains on a property that was once a family home and subsequently was rented out has drawn a lot of subsequent queries. Many, including yours, share a common feature: despite owning the properties for a number of years there will be no profit to worry about as these homes are still in negative equity.

It is a sign of just how dramatic the financial crash and the subsequent impact on property prices was that, over a decade later, many people have still not recovered, or seen their properties price climb back even to what they originally paid for it.

Of course, a lot depends on when you bought. And, as usual, it was those who were last in, the ones who bought in the year preceding the crash who paid the most inflated bubble prices and and who are most likely to find themselves still under water in price terms.

But it is important to realise that there is a significant difference between the taxation of gains (or losses) and the taxation of rent.

Many of these properties were rented out, often because the owners either needed to upsize for family reasons or because they relocated with their jobs.

People often conflate taxes and assume that because it is they who are paying then everything offsets one another – especially when multiple taxes apply to the same thing, such as a property. But that is very much not the case.

Different taxes

In this case, there is a tax on the income and a tax on any capital gain and they run along parallel tracks but they don’t interact – and they certainly cannot be set against the other to reduce an overall tax burden.

In capital terms, you have made no gain: the property is worth less now than when you bought it. So, as you note, there will be no capital gains tax. As the name implies, it is only gains that can be taxed. It would be adding insult to injury to do anything else.

Whatever loss you have made on this property can be used by you to offset other capital gains – such as on the sale of another property, shares, a painting or some other asset – but not income.

In the first place, the offset takes place against other gains you have made this year, so you only pay tax on the net capital gain for the year.

If you have no capital gains this year, or not enough to fully absorb any loss on this property, the residual amount is carried over to next year and beyond until such time as you have set it off against capital gains.

If you cannot wait for this property to return to profit, this can allow you sell other assets at a profit in a tax efficient manner.

But, unlike the position with a gain, you cannot use expenses incurred by you buying or selling the property to increase your loss, so you will be out of pocket to some extent.

In relation to income, that is taxed on an annual basis as it falls due. And while the final year of ownership may be written off for capital gains purposes because it is deemed to be owner occupied regardless of its actual status, under income tax rules, any rent paid to you in that year will have to be accounted for and returned for tax (minus any allowable deductions) in the same way as you have done since you started renting out the property.

You’re correct in thinking that there are certain contradictions in approach but that is the consequence of the ever evolving nature of tax law. There have long been differences in approach to capital taxes compared with taxes on income. The situation you outline in your query would be a nice way to soften the blow of your loss but it’s not doable.

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