I came across a piece discussing capital gains tax and I’m curious about how it could potentially impact me. I was once wedded and together with my spouse, we acquired a property in 2005. Unfortunately, we split up and I took over his share in the property, which was valued at around €90,000 in 2019.
Now, after a series of years, I have plans to sell the house and buy a new one as my main domicile. However, during the split-up, I had to vacate the marital home and resided in a rented space for a span of nearly two and a half years. The property was registered under the regulations of the Private Residential Tenancies Board and administered by a letting agency.
As a result of moving out of the family home for a while until the legal separation took effect, am I now obligated to pay some capital gains tax? My name has been on the mortgage from the outset and payments were made from a joint account, in addition to all utility bills registered in my name.
E.S.
Designed to tax profit made from increased value of owned assets over time, capital gains tax is essentially the Revenue’s view that this appreciation isn’t the result of personal effort but largely influenced by the progression of time and market trends.
However, one crucial exemption exists – the family homes. As per the principal private residence relief, it specifically excludes your primary residence from capital gains tax, provided it has been your main residence for the entire duration of your ownership. The relief also covers any adjacent land that doesn’t exceed an acre. The acre doesn’t factor in the actual physical space occupied by the house.
There are, naturally, a few exceptions and allowances, as it is usually the case with such matters. Notably, a significant exception is a scenario where the property is sold for developmental purposes rather than simply for inhabitation by the new owner. In such cases, any value above the property and site’s residential market value is taxable.
If the entire property isn’t used as your residence, you can only claim relief for that part of the property used as the family home. This primarily impacts individuals who operate a business from their family home.
The next relevant point is related to absences from the property for certain durations, which mostly tie in with employment or health reasons.
If your job necessitates living in a different location, that period can be considered as time spent in the family home for the purposes of capital gains tax, as long as it’s not beyond four years. If it surpasses this duration, you will receive a four-year allowance.
If you were living overseas due to work commitments and thus not occupying your house, the principal private residence clause will still provide coverage.
An additional exception applies in situations where you are unable to reside at your home because you are either hospitalised or staying in a care home.
Even if you are not living in it, renting it out, or it is vacant, an exemption exists for the final twelve months of property ownership if it was your family home.
The law does not seem to tackle separation issues. However, you would have been eligible if, at the time, your ex-husband was living in the propriety and it was owned by both of you. Considering your letter states that you only procured his share in the property as part of the separation agreement, this could have been attainable.
All these regulations, nonetheless, hinge on the fact that the property was not offered for rent.
As soon as you start renting the home, your complete exemption towards relief from capital gains tax will be scaled down.
You rented out your property for reasons which may have included struggling with mortgage payments as a solo owner. Renting a smaller place and offering your primary property for rent potentially could have balanced your finances.
You registered with the entity now called Residential Tenancies Board (formerly the PRTB) and seemingly covered any necessary tax on the rental income after accounting for expenditure.
How will the rental period impact your profit from the sale of this house? You mention a two-and-a-half-year absence from the home but it’s unclear if it was rented throughout this entire period or only for part of it. The Revenue office might grant some flexibility for any time before the rental began under these conditions, but they are not obliged to, and you would need to argue your case effectively.
To calculate tax liability on a pro rata basis, having accurate purchase and sale dates is vital. As an illustration, consider a situation where a property, bought back in September 2005, is planned to be sold the next month. That equates to a neat 19 years of ownership with a rental period of a clean cut two and a half years.
Going by these figures, out of the total 228 months of ownership (12 months x 19 years), the property was rented out for about 30 months. This converts to roughly 13 per cent when 30 is compared to 228.
Now, let’s switch our focus to any expenses that could possibly be subtracted from any profit made on the sale. These potential deductions could include legal and estate charges on both the purchase and sale, stamp duty on purchase, other expenses explicitly linked with the sale such as the cost of professional fees for valuations and advertising costs.
Additionally, if you’ve made substantial improvements to the property during your ownership, like an extension, which considerably boosted its worth, those costs could also be allowable. However, the Revenue will require solid proof that such investments truly increased the property’s value.
Once those deductions have been sorted out, the first €1,270 of any remaining profit is subtracted, recognising the capital gains tax exemption everyone is entitled to when selling an asset in a tax year.
Subsequent to this, 13 per cent (13.16 per cent to be exact) of the residual capital gain is calculated. This value is the taxable amount where tax is due at 33 per cent.
The core consideration here is that the property was leased for part of the ownership period. Irrespective of who the legal owner was or who lived in the property at various intervals, you are obligated to pay tax on the rental period.