Tax and the principal private residence

If someone rents out their home and, at the same time, moves in to a rented property (for example because of a change of job location that might not be permanent), and then later sells their former home (or dies and their executor sells it) without first moving back, is capital gains/acquisitions tax payable?

I feel it should not be as they only ever owned one property, but what is the law?

Mr J.B., email

The issue of people renting what is effectively their only property or principal private residence is increasingly an issue in a world where people move around – or out of – the State for jobs but cannot really sell their homes, either because they intend returning to them at some point or because they are in negative equity and the owner cannot afford to clear the difference with the lender.

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However, the rules covering the relief from tax of a person’s principal private residence are fairly clear. If you are earning an income from the property, then that is liable to taxation – at least above and beyond anything you might earn under rent a room relief.

Essentially, if you earn income from your home, you will be liable to capital gains tax on at least part of its increase in value when you go to sell it. The amount is determined by working out how much of the period of ownership was covered by owner occupation and how much by renting. The final year of ownership is considered to be owner occupation regardless of the actual position.

No relief

As for capital acquisitions tax, there is no relief there anyway for a principal private residence. Unless you are passing on your estate to a spouse, the value of all property you own, including your home, must be assessed in determining liability to capital acquisitions tax (or inheritance tax) by the beneficiaries under your will.

The one position in which the property stays out of the inheritance tax net is under dwelling house relief but, for this to apply, you would need to be living in the house at the time – health allowing – and the relative to who you pass it on to must also have been living there for the three years (at least) before inheriting it.

The rules of this scheme have been tightened up considerably in recent years and, in any case, do not appear to apply to a case like yours where the property is rented out at the time of your death.

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.