Accidental landlords look to calculate the tax fallout of property crash

My wife and I are accidental landlords but now we can see light at the end of the tunnel. We live in the west of Ireland but I own a three-bed semi rental property in a neighbouring county and my wife owns a two-bedroom townhouse rental property in a large town in another county.

I bought my house for €125,000 in 2003 and hopefully would get €200,000 for it. My wife bought her house for €125,000 also in 2003 but would probably get only €100,000 for it.

I have read your piece on offsetting capital gains tax and have a few questions for you. Can I offset any loss on my wife’s home against any gain I make on my house?

Also, we each lived in our own properties until 2009, so would we get any capital gains tax relief on that? Do we have to sell both houses in the one calendar year to avail of the capital gains offset relief?

Can I share my inheritance with brother left out of the will?

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How to fund nursing home care for mum if no family assets are in her name?

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What taxes apply to my cryptocurrency gains (and losses)?

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Will Dad’s letter gifting me land be valid if contrary to his will?

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Mr TL email

Accidental landlordism can be a lonely place. Most have little understanding of the rules governing rental properties because it was never something they intended. And, as we are all understandably preoccupied by our own financial stresses, we sometimes assume we are more or less alone in our plight.

But large numbers of people found themselves in the category of accidental landlord after the property crash. Many of those persuaded to climb on a surging property market in the Celtic Tiger were stranded by negative equity and an absence of buyers when the music stopped. When they needed to move home because of work, new relationships or a growing family, they were left, like you, with no prospect of selling and a struggle to secure a tenant who might be able to pay rent to cover the mortgage.

All these years on and it seems your wife’s former home is still in negative equity which shows the long-term malaise experienced by many regional towns despite recent increases in property prices.

In general, capital gains tax (CGT) is levied on the individual, with any losses accruing being offset against gains made in the same year. Where losses are not fully covered by any gain, remaining losses can be carried forward to be offset against gains in subsequent years.

However, there is special provision made in law for married couples and civil partners. This is covered under section 1028 of the Taxes Consolidation Act 1997 (TCA 1997).

Offsetting

Under this section, if your wife has losses arising that she cannot offset herself against other gains in the year she sells her former home, she can transfer those surplus losses for you to use against the gain on the sale of your home if it is in the same year.

The figures you give suggest you might make a gain of €75,000 on your home – although that is before allowable expenses for things like the legal and estate agent fees involved in the sale, and allowance for the period in which it was your main home which we look at below – so your chargeable gain will be a lot less, probably close to €40,000.

You think your wife will see a loss of €25,000 on her home. As you cannot use allowances to increase a loss, her selling expenses and time for which it was her main home are not relevant.

If she has no other gains this year, she can transfer that €25,000 for you to offset against your gain, reducing it to about €15,000. With your annual €1,270 CGT tax exemption, that figure drops again to under €14,000.

With CGT levied at 33 per cent, you’ll face a tax bill of roughly €4,500 on your €75,000 headline capital gain.

It is worth nothing that, while accommodation is available for married couples and civil partners on the issue of sharing losses, there is no longer any such provision for the sharing of the benefit of the €1,270 annual tax exemption afforded to everyone on capital gains accruing in a given year.

It was allowed at one time but was stopped in the 1998 Finance Act. So her €1,270 annual exemption does not also transfer to you.

Owner occupier

As you suspect, there is also an allowance made for the time you were living in the properties. At that time, for each of you, these homes would have been your principal private residences, which are exempt from capital gains tax.

That stopped being the case once you moved in together into your new home. Even if your former homes had not been rented, they would have been liable for CGT on any growth in subsequent years as you are allowed have only one principal private residence.

In capital gains terms, them being rented out makes no difference: it just means you are separately liable for income taxes on that rent minus any allowable expenses and have a responsibility to register the properties with the Residential Tenancies Board.

For CGT purposes, you will need to take the full period of ownership and work out what proportion of that is accounted for by its status as a principal private residence.

Calculation

In this case, both of you bought in 2003 and lived there till 2009. You are now looking at selling in 2021. So, you’ve each owned the properties for about 18 years.

If you bought in January 2003 and moved out in December 2009 – and you sell at the end of this year – that is six full years of owner occupation out of 18 years of ownership. Special relief is also given for the final year of ownership regardless of whether you were living there or not. That would mean that you get relief on 7/18ths of any gain.

If, however, you bought in April 2003 and left in October 2009, and depending on when this year you sell, you’ll need to fine-tune the calculation to find out what proportion of the period of ownership is exempt from tax and what is liable: you can’t just round up or down to the nearest year in either case.

Clearly, no such calculation is required for a property being sold at a loss.

On your final question – whether you have to sell both houses in the one calendar year to avail of the capital gains offset relief – the answer is that I am not sure. In general, as I said, losses not used in one year carry forward. However, that section 1028 of the TCA 1997 states that losses one partner or spouse cannot use are “deductible from chargeable gains accruing in that year of assessment”.

You certainly cannot use a loss in one year against a gain for a previous year so you would want to make sure, regardless of interpretation, that you do not sell your home in a tax year preceding the one your wife sells her former home.

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