Reliefs can knock large sum off capital gains tax bill on selling property

I am looking at selling a house I have rented out for over 20 years that was previously my own residence.

We purchased the house in 1995 and it was our main residence from 1995 until 2000 when we moved to our current home. We have rented the property since but are now thinking of selling it.

The increase in price would be in the region of 180K. What would be our capital gains liability should we sell this?

Is there any advantage to gifting the property to one of our children?

Helping my son and his wife renovate their home?

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Mr D.L., email

Capital gains can sound confusing for people when they have properties they used as their own home for a while before moving on for whatever reason and renting it out, but it’s not too complicated. However, to give you a precise figure, we’d need a bit more information than you have provided.

The best we can do as it stands is give you the tools to work in out yourself.

The basic rule on capital gains is that you pay tax on the difference between the purchase price and the sale price, in your case about €180,000. The tax rate for the past few years has been 33 per cent.

So at this superficial level, before we allow for the fact that you lived there for a while or any other reliefs available, you would have a bill of €60,000.

One of the principal reliefs on property ownership and tax in Ireland is a total exemption from capital gains tax for any property that is used as the family home – or principal private residence to give it Revenue’s formal title.

Where, like you, you have used the property as a family home for some of the time but not the whole period of ownership, the exemption applies pro rata.

You have owned the house for 26 or 27 years, depending on when in 1995 it was purchased, and you lived there for five years. So, on this relief, you will only pay 21/26ths or 22/27ths of the gain in its value, which is about 80 per cent of the gain.

Inflation

Before you get to that stage, however, you have to work out your taxable gain – as against this nominal €180,000 increase in value.

I’m assuming you have allowed for the fact that you bought in punts back in 1995 and are selling in euro. You also have to allow for the impact of inflation – at least up to the end of 2002 when inflation-proofing was ended.

You don’t give me your purchase price but, if the house was bought before April 5th, 1995, you need to multiply that figure by 1.309 to determine your new “base purchase price”. If you bought later in 1995, the multiplier is 1.277.

Essentially, this is increasing the purchase price by about 30 per cent to allow for inflation, which will have a notable impact on any CGT bill.

Then you are entitled to deduct from the net gain any expenses you incurred that were directly attributable to its purchase or sale – such as legal and auctioneer fees.

This gives you your net taxable gain. But, before you crunch the numbers, there is one last thing – the final year of ownership is considered to be owner-occupied regardless of whether the property was rented in that time, or lay vacant.

So the 21/26ths fraction to determine your tax bill becomes 20/26ths instead – or 21/27ths whatever might be the case.

Just to give a rough example. Say you bought the place for £95,000 back in 1995. In euro terms, that’s €120,625.

Assuming you bought it early in 1995, the inflation multiplier is 1.309 which increases this purchase price for capital gains tax purposes to €157,898. You say the property is now worth €180,000 more than you bought it for, so that means – for this example – it is worth €300,625.

The new base price means your capital gain is now €142,727.

If you expenses in purchasing the property were €5,000 and selling it will cost you €10,000, that knocks a further €15,000 off the gain, bringing it down to €127,727.

Taxable gain

But you’re only being taxed on a fraction of this to allow for the time it was your family home. Say, you bought in March 1995 and finally sell in March this year. That will be a neat 27 years but you are assessed for CGT only on 21 of those years – allowing for five years as a family home and the last year of ownership.

Multiplying your gain by 21 and then dividing by 27 gives you your new taxable gain of €99,343. Very finally, you are entitled to make a capital gain in any year of €1,270 before being taxed.

This brings the gain down to €98,073 ...and the tax bill to €32,364, or roughly half of what you started with.

Clearly, you’ll need to work out your own figures, but that gives you a sense of the process.

In terms of your final query – whether there’s any point gifting the property to your children, the answer is no. You will still be assessed for capital gains up to the point of transferring it to any one or more of them. However, if you hold on to it until you die, it will pass to them with no capital gains tax bill attached as the gains will be deemed to have died with you.

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.