Q&A

Q&A: How much tax will I pay if I sell my rental?:We bought our first house in 1993 for £50,000 (about €65,000). In 2003 we had our property valued at €300,000 and decided to invest in a new house and keep our first house to rent. We were told that when we eventually sold, we would have a tax liability on any profit above €300,000. In a recent conversation with a friend I was told the tax liability would be on the profit above €65,000, the original price.

The house is now worth approx €220,000. I had intended to sell it when the current lease finished, leaving us with a minimal mortgage on our second house. We thought there would be no tax liability as the value had dropped significantly.

Can you help clear up what advice was the correct? If we are liable on the difference between €65,000 and €220,000 we would be forced to lease for longer as we could not afford to pay. I feel we are being harshly punished for investing as, had we just sold our first house and bought our second house with the proceeds, there would have been no liability and a very small mortgage.

- Mr BC, Dublin

A:Both the original advice and your friend are incorrect. The truth lies somewhere between the two.

As you say in your final paragraph, there is no tax liability on the sale of your main home – or principal private residence in Revenue parlance. If you had sold the house in 2003 when you bought your current house, there would be no capital gains issue.

However, once you had the two properties, one was designated as an investment property and so becomes liable to capital gains tax (CGT). The more pertinent question, clearly, is how much of a bill you are facing. Your original purchase price of £50,000 converts to €63,487.

Until the end of 2003, there was a multiplier in place for capital gains tax adjusting the purchase price of the asset to allow for inflation, until it was abolished by Charlie McCreevy. However, until that time it still applies to you. If your house was bought before the end of March 1993, the multiplier would be 1.356 (raising your purchase price for capital gains tax purposes to €86,088). If bought after April 1st that year, the multiplier would be 1.331 giving you a purchase value of €84,501.

If we assume you bought the house at the start of 1993 and you sell it later this year for €220,000 – the €300,000 “valuation” is irrelevant – you will have a “profit” of €133,912. You are able to reduce this figure by offsetting certain expenses incurred in the purchase, enhancement and sale of the property. These would include legal and estate agency fees for the transactions, and stamp duty.

You owned the property for 17 years, of which it was your main home for 10. The last year of ownership is also exempted for CGT purposes. Thus, Revenue sees the property as an “investment” for six of the 17 years of ownership. In assessing liability to CGT, it takes only 6/17ths of the “profit” into account – in your case €47,263.

The first €1,270 of your capital gain is also discounted (€2,540 if the property was owned jointly by you and your wife) – as long as you have not used the exemption for any other CGT transaction this year.

Assuming the property is jointly owned, the amount liable to tax now falls to €44,723. The prevailing CGT tax rate is 25 per cent, giving you a liability of €11,181. As I don’t have details of other allowable expenses you will have incurred, your eventual tax bill will be lower.

This column is a reader service and is not intended to replace professional advice. No personal correspondence will be entered into.

Please send your queries to Dominic Coyle, The Irish Times, 24-28 Tara Street, Dublin 2. E-mail: dcoyle@ irishtimes.com