Accidental landlords get no break when it comes to capital gains tax

My husband and I bought a two-bed apartment in 2005. We had one child at the time. In 2010 we had our second child. The property was too small and we could not sell due to negative equity. We decided to rent a house and rent out our apartment. We are still renting. We pay tax and are registered with the Private Residential Tenancies Board.

My question is re capital gains tax. Where do we stand? We don’t have any savings and the apartment is probably €40,000 in profit. It is nowhere near enough for a deposit for a second mortgage. As we are accidentally landlords, who had no intention of being so, is there an exemption?

Ms CB

Accidental landlord is a term that will ring familiar with so many homeowners who bought in the Celtic Tiger years, especially those bought into the mantra that they should “get on the housing ladder” even if that meant buying a home that was never going to be big enough when intended family came along.

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Your story is so familiar. Having bought in the heady days of the Celtic Tiger, by the time you decided to move on to accommodate a growing family, the market had crashed and you were left in negative equity – with a mortgage that was bigger than the reduced value of your apartment. Even if you had found a buyer, you would have had to make up a shortfall to the bank between what they offered and the outstanding mortgage.

That’s almost like putting good money after bad and, like so many people at the time, you were left hoping that a market recovery would see the property recover its value at least to the point where you had bought it. Meantime, you had little choice to rent it out, hope that money would cover the mortgage (it rarely did), and move on to house your own growing family.

Part of the issue, of course, was that lenders had been dishing out 100 per cent mortgages back when you bought the apartment – or even 10 per cent-plus in some cases – so you had none of the equity that a deposit would have given you. And clearly, from what you say, any inroads you made in the mortgage over those first five years were wiped out by the fall in property values by 2010.

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With bank lending effectively frozen and no savings at the time anyway to put down a deposit which would then have been required, renting was the obvious answer.

Sensibly, you have kept things in order by registering the tenancy on the property you own with the Private Residential Tenancies Board, now known as the Residential Tenancies Board, and are up to date on your taxes in relation to rental income.

It is interesting that you are still in this position – renting where you live while still renting out your former home. Most accidental landlords cut and ran as soon as they could once they got out of negative equity and with prices now well in advance of 2005 levels, I presume that opportunity is there.

You say the property is “probably €40,000 in profit”. I assume this is €40,000 over the original purchase price. But now that you’re 18 years into your mortgage, I assume you would have considerably more equity in the apartment and therefore more money available to you as a deposit once it is sold to allow you consider purchasing a home that would suit your family at this point – although I certainly understand that it would not allow you to secure a second mortgage on a new home while also continuing to own this apartment.

Which brings us to capital gains.

The overarching rule on capital gains is simple. If you own just one property and are using it as your main home, then it is free from capital gains tax. In any other circumstances, capital gains tax (CGT) applies when you sell an asset that you previously acquired – a property, stocks, a piece of art… whatever.

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In your case, this property has been owned by you for 18 years but you only used it as your family home for five of those. The fact that you chose to accommodate your family elsewhere for whatever reason is of no interest to the Revenue Commissioners. There is no special exemption for accidental landlords. As Revenue sees it, since 2010 this property has been an investment delivering an income to you. They will simply consider that two-thirds of any gain in the value of the property is subject to capital gains tax at 33 per cent if you sell it this year.

Two-thirds? Yes, on top of the five/18ths that is exempt because you lived there, the last year of ownership is considered owner-occupation regardless of the situation in reality, so that brings the CGT exempt period to six/18ths, or one-third, leaving you with two-thirds of any gain liable to CGT. Of course, Revenue doesn’t round up to years so the actual proportion will depend on when exactly in 2005 you bought the apartment and when exactly you sell it so you will need to juggle the calculation to account for that.

If you’re saying the gain is €40,000, two-thirds of this would be €26,400. You then deduct the €1,270 to allow for the additional annual exemption against capital gains tax (assuming this has not already been used on other asset sales this year). So you are left with a gain liable to tax of €25,130. At 33 per cent, the tax on this will be €8,293.

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That will leave you with a profit of just shy of €32,000 on the deal, plus obviously any equity you have in the apartment after the mortgage is paid off as part of any sale to hopefully allow you buy a new home.

Meantime, of course, you should claim the new rent tax credit which should be worth €1,000 to you and your husband. You can claim for last year now, and then (once you file a tax return for the relevant years) for this year, next year and 2025 if you are still renting.

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. This column is a reader service and is not intended to replace professional advice