Will renting out my negative equity home leave me with a tax bill?

I purchased a property with a friend in 2006 for €360,000. We lived in it for a number of years. However, due to changes in our circumstances – loss of jobs, financial crash, relocation etc – we had to rent out the property. We both complete our annual tax returns on this income and neither of us owns another property: we both rent.

The property has been creeping out of negative equity slowly so we have decided to sell and expect to make around €310,000, there will be €270,000 outstanding on the mortgage.

As this is no longer our Private Principal Residence, will we be subject to any CGT or other taxes. Local Property Tax is paid annually but I would imagine is in the wrong bracket as it hasn’t been amended since it’s inception.

Ms A.R., email

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With all the headlines about rising prices and unaffordable housing – both of which are clearly true for a large number of people – the reality of the disastrous financial crash of 2008 for a generation of homeowners can be a salutary reminder.

Fifteen years on from your purchase of this home, your story shines a light onto the financial and other traumas that many young homeowners were forced to go through. Among other things, the fact that you still have a mortgage that amounts to three-quarters of the purchase price after 15 years shows that things have been tough over at least part of that time.

As you clearly know, there is no tax due on a person's principal private residence – their family home. However, things can get more complicated once the property is let out for any reason.

Two main issues arise. First, any rental income is taxable at your marginal rate, allowing for permitted expenses, and must be returned annually to the Revenue Commissioners. Second, the tax exemption on family homes disappears leaving homeowners with a potential capital gains bill.

Capital gains

However, the key words here are “capital gains”. Owners who have lived in a property as a family home and then rented it out must pay tax pro rata on any gains made over the period of their ownership to reflect the portion of ownership during which the property was rented.

But if you have no gains, there cannot be any capital gains tax.

You bought this property back in 2006 for €360,000 and, even allowing for its slow “creeping out of negative equity”, you anticipate selling it 15 years later for €310,000. That’s a loss of €50,000.

Unless you are telling me that you expect to make a profit of €310,000 in which case there will certainly be a tax bill. However, given you say the property is only slowly moving out of the red, I’m going to assume this is not the case.

So capital gains is not going to be an issue for you. And, as you and your friend have been filing returns and paying tax to Revenue since you had to move out and rent this home, there will be no outstanding tax bill there either.

That leaves just the issue of Local Property Tax. You raise an interesting conundrum here. You note that you pay the Local Property Tax annually but expect that you are doing so at the wrong rate as the valuation hasn’t been amended since its inception.

Again, two things arise here. First, you are correct, no valuations have been amended since the local property tax was first introduced in 2013. This is one of the great displays of political expediency over good sense in recent Irish politics but that’s not your problem. You can only pay at the valuations in place and you appear to have done that.

Revaluation

As an aside, if your property is now worth €50,000 less on the market than when you acquired it, the likelihood is that you would be paying less local property tax under a revaluation rather than more.

The one issue that can arise with local property tax (LPT) is where Revenue determines that the initial valuation given to them was incorrect. This was done by self-assessment – i.e. you and your friend will have submitted a value to Revenue for the purposes of local property tax.

When you sell, you will need to get general clearance from Revenue that the property is LPT compliant. This is done through the LPT section of their website by completing a Form LPT5.

For properties under the value of €350,000, there is no issue relating to the applicability of the original valuation. Properties valued at more than this also require what is called specific clearance which requires you to show the original valuation was reasonable or that the eventual sale price is within certain parameters from the original valuation.

In your case, I just don’t see there being any issue with local property tax. After the mortgage and expenses have been paid, you will likely be left with €30,000 between you which will help with any future property purchase though it will fall some way short of providing a deposit in itself.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or email dcoyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice. No personal correspondence will be entered into