Q&A: Will I face a tax bill for giving apartment to my child who has health issues?

I bought an apartment in 2018 and rented it until the end of the first quarter in 2021. I got ill a few months later and my daughter lived there for a few months, mainly as security and of course to save for her own property which she bought in October of last year. I want to give it now to another one of my children who has health issues. The apartment has increased in value by about €50,000 since I purchased it and, because I am unable to look after it now, what are the implications if I do this? - Mr PM

It can be tough to manage things – especially something like an investment property – when you are not in the best of health so I can see why you’d be looking to sort things out. As you say, the property hasn’t been rented out since early last year so there’s a certain attraction in getting it sorted, not least if one of your children is in need of longer-term accommodation.

But these things are never straightforward and any investment property is going to have tax implications.

If this was your own family home, handing it over to your child would have no tax issues for you – though it might possibly have a gift tax issue for them if it was valued at more than €335,000. They would also face a bill for stamp duty at 1 per cent of its market value.

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But investment properties are different. Clearly you only pay income tax on rent when you have rental income, so you will only have had that issue up to last March. However, you will be liable for capital gains tax (CGT) as only your family home – or principal private residence in Revenue-speak – is exempt.

This case is fairly straightforward as the apartment has never been your home. You will be liable for CGT at 33 per cent on the full €50,000 increase in the apartment’s value – apart from the €1,270 CGT exemption available to you in any year.

That means a tax bill of up to €16,081 (the €50,000 gain minus €1,270 CGT exemption multiplied by 33 per cent tax). However, it won’t be that high, which is why I say “up to”. You will also be allowed deduct any costs you incurred in buying the apartment in 2018 and in transferring it to your child. Chiefly, these will be legal costs but they are likely to knock €1,000 or more off the tax bill.

If you “enhanced” the apartment in some way, which is unlikely frankly, that too would be claimable. Upgrading furnishings and fittings don’t count (though they would have been claimable against rental income before income tax) though something like new, upgraded windows might.

As far as Revenue is concerned, you are getting to keep two-thirds of any capital gain in the property. And that’s what would happen if you sold the apartment on the open market. Revenue’s view is that is very much your choice to give the property to your child rather than sell it to her – even at a price below its market value. So there is no allowance made for the fact that you are transferring the property cost free to your daughter.

As a final point, gift tax would likely apply for the daughter who stayed there rent free last year. I certainly understand the security point of view: it makes sense not to leave property vacant. And you’d be far from the first Irish parent looking to help out a child who is trying to save money for a deposit in an environment of ever rising prices. However, it remains the fact that she is an adult and living rent free.

The market rent of the property would be seen as a gift to the daughter who stayed there rent free last year on any market rent over the €3,000 small gift tax exemption limit. Her stay though won’t lead to a tax bill as she does have that €335,000 tax free limits on gifts and inheritances from a parent available to her, but it will eat somewhat into it.

Any future inheritance by either child from you or their mother would have to be added to the benefit they have enjoyed respectively in relation to this apartment before assessing whether the lifetime €335,000 tax free gift tax/inheritance tax threshold has been exceeded and tax is due, also at 33 per cent. Of course, the threshold may have increased (or fallen) by then.

*****

* I mentioned last week in the piece on Fair Deal and renting out the family home that, until recently, 80 per cent of the “net rent” would be payable as part of your Fair Deal contribution.

Reader MK was quickly on to me to point out that the contribution from rent is net only of taxes, levies and medical expenses as with all other income for the purposes of Fair Deal. It does not allow for insurance, management fees, repairs etc, which would normally be standard reductions against rental income before tax.

“If it were 80 per cent of net income, it might be tenable,” he said. Following changes this month, the contribution is now 40 per cent of rental income, not 80.

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