I’ve had conflicting advice. When a Section 23 property is sold at a loss, can that loss be carried forward and offset against capital gains arising in the future, as normal losses can?
Because of the Section 23 status, one accountant I consulted believes the loss cannot be carried forward.
I bought a Section 23 property in 2005 for €285,000, & rented out for 15 years. l sold it in 2020 for €170,000. All relief (€242,000) was used up. The CGT return, recording the loss, was filed with Revenue as required.
Can the loss on that Section 23 property be carried forward and offset against capital gains arising on other asset sales in the future?
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Ms M.C.
You’ve been extraordinarily unfortunate with this investment in terms of capital gains although you certainly seem to have benefited in full from the section 23 reliefs themselves.
Of course, having acquired the property in the middle of the Celtic Tiger, your period of ownership includes the post-Tiger crash in property prices and then you were selling in another grim time for the sector as the Covid pandemic took hold. But even so.
Central Statistics Office data shows that prices in October 2020, when you were selling this property, were 17.2 per cent off their peak nationally, and still 22.3 per cent down in Dublin. However, that peak was in 2007 and there was fairly rapid escalation of prices between 2005, when you bought this section 23 property, and 2007.
That means the market was likely around parity between the two dates. However, you’ve taken a 40 per cent hit on the investment.
Clearly the attraction of section 23 in terms of tax write-off on rental income would have been attractive back in the day and I presume that is part of what escalated the price at that time.
Section 23 relief was introduced way back in 1981. At the time, it was seen as giving a boost to a construction sector that was languishing at the time while also incentivising the rejuvenation of urban areas that had seen better days.
Essentially, the relief allowed owners to write off the cost of construction conversion or refurbishment against rental income. For much of its life, section 23′s write-off was not just against the rental income of the refurbished property but any rental income the property owner might be getting from that and other properties.
Initially, they could also set off mortgage interest on the property against the rental income.
Over time, the rules were tightened and certain incentive schemes were phased out.
The relief against mortgage interest disappeared in 1998 and the incentive schemes themselves were gradually phased over between 1999 and 2008 as concern grew that they were only adding to the property price bubble at the time. The 2011 Finance Act also moved to restrict the benefit against rental income from the property concerned rather than all rental income and put a stop to carrying over of unused relief.
As a result, any buyer of the property would be less inclined to pay the sort of premium you probably did back in 2005.
However, I cannot see anywhere a measure that would curb the ability to carry forward capital losses on the eventual sale of the building.
There are two distinct things here – the relief against rent and the capital gains tax position. For sure, there was a sharp curb on the benefits of the rent relief – including that any subsequent owner could no longer benefit from unused relief. However, this was not an issue in your case as you say you got the benefit of the relief in full yourself.
But the rules on capital gains remain separate. And they mean that if you sell an asset at a loss, you are entitled to offset that loss against other capital gains arising in the same year. Where there are no offsetting gains, or the gains made do not fully offset your loss, you are entitled to carry forward the loss outstanding to offset against gains in future years.
You cannot attempt to claim a refund by offsetting the loss against gains in previous years.
These are fairly standard rules and I do not see how you would be deprived of the right to use the capital loss against other capital gains, simply by virtue of having been able to avail of section 23 relief on the property.
In this case, you have taken a €115,000 hit on the value of this property over the period of your ownership and you are entitled to offset that against any gains you made in 2020 and beyond until the full €115,000 was written off. You cannot enhance that loss but you are entitled to avail of normal capital gains tax rules.
You have filed all the details as required by Revenue and that has not been queried in any way in your assessment.
I am not sure where the accountant who you were talking to was getting his information but I suspect there might be some confusion between what is now allowed under section 23 and what is allowed under capital gains tax rules.
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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