I read an article there about capital gains tax and was wondering how it applies to me. I was married and purchased a house with my husband in 2005. We separated and I bought him out by his equal share in equity, approximately €90,000 at the time in 2019
A number of years later I am now looking to sell and buy a new house as a primary residence.
However, during the separation I had to vacate the home and rent for a period of almost two and a half years.
That house was registered with the Private Residential Tenancies Board and done through a letting agency.
Will I now have to pay some capital gains tax as I had to move out of the family home for a period of time until the separation happened legally?
My name has always been on the mortgage and paid from a joint account. And my name on all bills..
Ms E.S.
Capital gains is designed to tax the increase in value of assets we own, the Revenue view being that the increase in value is not attributable to our endeavour but simply to the passing of time and market forces.
But there has always been one very important exemption – family homes. The principal private residence relief specifically excludes your main, or family, home from capital gains as long as you own it and use it as your only residence – or main residence – during the entire period of your ownership.
The relief includes land around such a home as long it amounts to no more than one acre. That one acre does not include the footprint of the actual property.
There are, as always with this things, various exceptions and allowances.
In this case, one important exception is where the property is sold for development rather than simply for accommodation by the new owner. In that case, everything above the market value of the property and site as a residence becomes taxable.
If you do not use all of the property as your home, then you can claim the relief only for that portion of the property that is the family home. This would mostly affect people who run a business out of the family home.
Then we come to the piece that is relevant to you – absences from the property for certain periods.
These mostly relate to employment or health.
If your employer requires you to live elsewhere, you can treat that period as occupation of the family home for capital gains tax purposes as long as it does not extend beyond four years. Where it does, you will get allowance for four years.
If you were not using the house because you were working abroad, you would also continue to be covered by the principal private residence clause.
A third exemption is where someone cannot live in the home because you were in hospital or in a nursing home or convalescent home.
There is also an exemption for the final 12 months of ownership of a property that was the family home, regardless of whether it is occupied by you, empty or rented in that last year.
The law appears to be silent on the issue of separation, although if your former husband was occupying the property at that stage and you both still owned it, you would qualify. As your letter indicates you only bought out his equity in the property as part of the separation agreement, this would have been possible.
However, all of this is predicated on the property not being rented.
Once you rent out the home, you will see your absolute exemption to capital gains tax relief curtailed.
And you did rent out the home for whatever reason, possibly because, as a now single owner, you would not have been able to meet the mortgage payments on the home at that time and renting a smaller place while letting out your own home allowed you to juggle all the bills.
You registered with what is now known as the Residential Tenancies Board, though it was the PRTB at the time, and presumably paid any income tax due on the rental income after allowance costs.
So how will the rental period affect your gain on the sale of this home. You say you were out of the home for two and a half years. It is unclear whether it was rented for all of that time or just a part of it. Revenue might give you some leeway for any period before it was first rented in the circumstances though they certainly do not have to and you would need to make your case.
As the tax liability is worked out pro rata, you will need the precise dates of purchase and sale, But for the purposes of an example, let’s assume you sell the property next month and bought it in September 2005 – so a tidy 19 years of ownership. And lets also assume that the rental period is a tidy two and half years.
On that basis, the property was rented for 30 months out of 228 months of ownership (19 x 12). Thirty as a proportion of 228 is just over 13 per cent.
Let’s leave that to one side for a minute and take a look at costs that you might be able to offset against any gain on the sale. These include any estate and legal costs incurred both when you bought the property and when you sell it. It also includes any stamp duty you paid on the purchase and certain other costs specifically tied into its sale – such as getting a valuation or other strictly relevant professional fees and the cost of any advertising of the property.
If you invested in the property during your ownership in a way that significantly enhanced the value of the asset – such as by building an extension, its cost would also be allowed but Revenue will want to be convinced that any investment did actually enhance the value of the asset.
When you have sorted those deductions, you subtract the first €1,270 of whatever gain is left as everyone is entitled to this capital gains tax exemption if they sell an asset in a tax year.
Only then do you work out what 13 per cent – 13.16 per cent to be precise – of the remaining capital gain is. That is the amount that is taxable and you will pay tax at 33 per cent on this portion of the gain.
The key thing here is not whose name was on the documents or even who was or was not in the house for certain periods, but the fact that it was rented out for some of the time you owned it. Regardless of other circumstances, you will be assessed for tax on that rental period.
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 with a contact phone number. This column is a reader service and is not intended to replace professional advice
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