Dominic Coyleanswers your queries.
Realising value of second house
I am 50 years of age, married with no children. Both of us work and have pensions. We have a family house (no mortgage) and a second house. The second house is worth between €400,000 and €500,000. We do not want to rent or lease it out. Can we sell this house and place the proceeds into a pension?
Are there minimum/maximum amounts? Can I possibly put all of the money into a pension fund, thereby side-stepping taxes? I heard something about investing the money from the sale and taking out an annuity as being one option.
C McC, Dublin
There are two broadly separate issues here. First, you have the tax situation in relation to your second home and second the relief applicable on pension contributions.
While a person's principal private residence is exempt from taxation, a second home is generally treated as a capital asset. As such, upon its disposal, you become liable for capital gains tax. The fact that you have not and do not intend to rent the property has no bearing on this. You will be liable in any case - at a rate of 20 per cent - on the difference between the original purchase price of the second property and the eventual sale price.
If the property was acquired before 2003, you will be entitled to apply an indexation factor to offset inflation up to the end of 2002. You can also deduct expenses involved in the purchase and sale of the property and the first €1,270 of any capital gain is also exempt.
Tax relief on pensions is allowable against income tax, not capital gains. People over the age of 50 are allowed to claim relief at their top rate of tax on amounts up to 30 per cent of their annual earnings invested in a pension scheme.
Of course, given you are paying the CGT anyway, there is nothing to stop you investing up to the 30 per cent threshold this year and in succeeding years to reduce your income tax liability.
Taxation status of rented room
I was told by my accountant that I could rent a room in my home and earn approximately €5,000 or €€6,000 without declaring it in my tax returns.
My daughter has just applied for a tax refund on rent she paid me over a couple of years and I was under the impression that it would not affect me.
I read your article in the paper a few weeks ago, which would indicate that it would affect my tax. Could you clarify this for me?
K M, email
I am sorry for the confusion which is entirely down to me. In general, it is certainly the case that people renting out property must register as landlords and are liable to income tax on rent received.
However, as you are aware, there is a dispensation under the rent a room scheme. This allows people to receive a total of €7,620 in any tax year for renting out a room or rooms in their principal private residence without incurring any liability to income tax.
Two points to bear in mind. First, if you exceed that limit by even €1, the entire sum becomes liable to income tax. Also, the sum is the total received from the exercise of renting a room, including any sums paid for such things as food, laundry or other goods or services.
There is nothing precluding parents from availing of the rent a room allowance in respect of money paid by their own children living in the family home.
From your daughter's viewpoint, the situation is a little less clear. She can claim an allowance at the standard rate of income tax on money paid as rent but not for money paid for "board and lodging".
Thus, while you can claim relief on the whole sum under the rent a room scheme, she might not necessarily be able to do so. Section 473 of the Taxes Consolidation Act - a daunting piece of legislation - allows for the money paid by your daughter to be apportioned between rent and other related goods and services, such as food and laundry, heat and light.
Such an apportionment is made by the inspector of taxes. However, Minister for Finance Brian Cowen indicated in a parliamentary answer that there was a question whether the money paid by children to parents was pure rent or a contribution to family outgoings.
In an answer to Labour leader Pat Rabbitte, he said: "There is no special treatment for individuals residing in the parental home, wishing to claim rent allowance. However, in such cases there is the question as to whether an amount paid by such individuals represents rent within the meaning of the Section 473... For example, in the case of working individuals who continue to live with their parents, it would not be considered unusual if such individuals contributed to normal family outgoings."
He added that claims for rent allowance were examined on their individual merits and "what may prevail in one case may not necessarily be replicated in another case".
Please send your queries to Dominic Coyle, Q&A, The Irish Times, Tara Street, Dublin 2 or e-mail to dcoyle@irish-times.ie. This column is a reader service and is not intended to replace professional advice.
Due to the volume of mail, there may be a delay in answering queries. All suitable queries will be answered through the columns of the newspaper. No personal correspondence will be entered into.
