Will I have to pay capital gains?

jeronimo

Hi all,

Could anyone help with a query about capital gains tax on selling a property? The property in question was bought with my ex partner, and we lived there for just under a year before splitting up after which I moved in with my parents and she lives in a state subsidised apartment with our son. That was four years ago and since then it has been used as an occasional weekend residence (It is about two hours from Dublin, where we now live). It has never been rented out to anyone else.

Now we want to sell it, and will probably not be able to afford another property for quite a while.

Does it classify as a primary residence? I work in Dublin but I have no other property in my name, and I go to the house fairly frequently.
If it does classify as a primary residence, will I have to pay capital gains on it even if I am not going to (am unable to) invest the proceeds in another primary residence?
Would my ex have to pay capital gains on her share if she has lived in a rented (state subsidised) apartment for the past four years?

Any insights would be much appreciated!

J.

mad m

There was a similar business question asked in the Irish Independent today.

WE bought our first house as first-time buyers over three years ago.

Initially, we lived in that house as our principal private residence.

A year ago, we purchased a second house, in which we have lived for the past year.

When we purchased our second home, we planned to rent the first home.

However, we had difficulty finding tenants and have recently decided to move back to the first house and sell our second house.

No one has been living in our first property for the last year.

My question is: do we need to pay capital gains tax on the second property that we intend selling, even though we have been living there as our principal private residence for the last year?

It really depends on which house was your principal private residence (PPR) for the last 12 months.

Where you have two properties which could both be regarded potentially as your principal residence, you must notify your Inspector of Taxes of your choice of house as principal residence.

This notification must be made in writing within two years of the date you want to treat the house as a principal private residence, according to Oonagh Casey of BDO Simpson Xavier.

If the inspector agrees, the matter is settled for the period in question.

After receiving this approval, whichever house you decide is your PPR will affect your potential tax liabilities - both capital gains tax (CGT) and stamp duty.

When you sell the second house, you will not have to pay CGT, as it has been your PPR for the full period of ownership and, therefore, eligible for PPR relief.

If you subsequently sell the first house, the period for which the second residence was your PPR must be excluded when determining the length of PPR for the first house.

If you don't claim PPR relief for the second house, you must pay 20pc CGT on the difference between the price you sell it for, less costs, and the price you paid for it, less costs.

Regarding stamp duty on the first house, there are conditions for getting the first-time buyer stamp-duty rate.

You, the first-time purchaser, must live in the house as your principal place of residence for five years or until the house is sold.

First-time buyers

No rent (other than under the "rent-a-room" scheme) can be received in the five-year period.

First-time buyers who receive rent (or payment in the nature of rent, other than under the rent-a-room scheme), within five years of owning the house, must pay a penalty.

This is equivalent to the difference between the amount of stamp duty that would have been charged if the relief had not applied, and the amount of stamp duty actually paid.

The fact that you have not occupied the first house as your PPR (and have possibly decided to have your second house treated as your PPR) for a year of the five-year period, could result in an exposure to stamp duty, even though you did not receive any rent.

CHARLIE WESTON

Andrew Duffy

The article doesn't really describe the same situation as it describes a couple that owns two properties - you don't. The best thing for you to do is to talk to the solictor that is handling the sale of the house; you'll need him to make up a contract to divide the proceeds of the sale as well so I doubt he'll charge too much extra for the advice.

Kinetic^

Hi Jeronimo,

I've held off answering this till I read my tax books as I had to make 100% that I was giving the correct advice.

Ok say you & GF bought your house back in January 2000 for €150k (merely an example figure and I know punts were around back then).

You split up after a year, so you occupied the house for 12 months and since then it's been empty.

You want to sell the house at December 2005 (just to make things easy) and it's estimated current value is €350k.

You've to work out any costs involved in buying like solicitors fees, stamp duty etc. and add then onto your original cost of €150k. Say for example it comes to a total of €160k. These costs are obviously not the equivalent of €160k today so the Revenue have an index table for CGT, the rate for this would be 1.193. So that brings your base costs up to €191k.

Take your base cost of €191k away from sale proceeds of €350k, which leaves you with a gain of €159k. Now we have to apportion out the time element.

It was occupied for the first 12 months, and because it was occupied at one point in time, you automatically are given the last 12 months as occupied. That gives us 2/5 years occupied.

That means that 40% of your gain is exempt. So we take away 40% of €159k and that leaves us with a gain of €95k. (€47.5k each)

Each individual gets an annual exemption of €1,270 for CGT, so if you take that away from your gain you're left with €46,230 of a taxable gain. This is then taxed at 20% which gives you a Capital Gains Liabilty of €9,246.

I know it all seems very complicated but it's very straight forward. If you've any further questions feel free to PM me.

Edit: costs of selling the property can also be deducted from the sales proceeds.

latenia

I'd just sell it and forget about CGT. The chances of this coming to someone's attention in the Revenue are virtually nil and even if it did it would be a very petty-minded inspector who decided there is a liability. Even in this scenario you could still put in a strong appeal. Your liability will still only be the same as you are going to pay anyway.
Remember, you just say you lived there for the majority of the time. It's up to them to prove otherwise and I don't see how they can do that.

FillSpectre

My understanding is the lawyer will inform the revenue as he is leaglly obliged to do so. Either way legally yes you have to pay CGT. Trying to run from it or not knowing about it won't be much of an excuse. They can get you at any point and the non-resident accounts proved that already.
In 10-15 years there will be angry tax officials looking to catch people who made money on property and avoided tax. THe penalties were very steep so be fully aware that this a is a huge gamble .

Kinetic^

latenia wrote:

I'd just sell it and forget about CGT. The chances of this coming to someone's attention in the Revenue are virtually nil and even if it did it would be a very petty-minded inspector who decided there is a liability. Even in this scenario you could still put in a strong appeal. Your liability will still only be the same as you are going to pay anyway.
Remember, you just say you lived there for the majority of the time. It's up to them to prove otherwise and I don't see how they can do that.

:rolleyes: Nice job, tax evasion your speciality then???? Of course the revenue will find out about it. Interest and penalties is something you don't want to have to pay.

jeronimo

Hi Mad, Andrew, Keyser and Latenia,

Many thanks to all for taking the trouble to reply. There's certainly plenty of food for thought there, and some very valid points.

Keyser, your formula looked complicated at first but on the second reading it made perfect sense (albeit a bit depressing - but that's taxes for you...). Latenia, your suggestion is extremely tempting, especially seeing as I was forced to come back to Dublin through no fault of my own and in very difficult circumstances, but I believe the fact I work in Dublin may go against me...

If you don't mind I would like to pick your brains/knowledge once more.

I paid for the purchase and maintenance of the house 100%. I have already consulted a land lawyer about that who told me that seeing as I can prove this it means that according to law I am entitled to far more than 50%, and was advised to offer an amount based on the year we lived there, and take it to court if my partner refused. This is where we are now. If I have to go back to the lawyer I would like to go with a bit of previous knowledge, hence my queries here.

My question is (this bit has nothing to do with taxes but I ask in case you can shed some light anyway) My ex does not work and is on state subsidies and my maintenance, and living in a house subsidised by the state (we have joint custody of our teenage son). Can the state claim money, or dock her benefits if they discover she has received money from a house sale? What are the chances of them finding out?

Coming back to the tax angle, if it is not in my ex’s interests to be seen to have received money, could she sign to say that she gives up her claim on proceeds of the house sale and it all goes to me (in reality it would be in exchange for me giving her a cash settlement that the authorities would not be able to trace – her way of doing things not mine – I just want rid of the house!!). I presume that this would not be questioned by the authorities (tax or otherwise), and I would just have to pay the capital gains as if I had bought and sold the house as an individual. Or am I missing something?

Thanks again for all your help,

J.

jeronimo

Fill and Keyser,

Your posts came on just before I posted mine and I hadn't seen them. Thanks for the warning!

J.

FillSpectre

State benifits don't tend to be effected by relatively small amounts (below 100k) AFIK. Sale of homes might be exempt. Ring the social welfare and say you are afraid she will ask more maintainece if her benifits are removed to find out the limit.

I would be extremely surprised to hear your ex partner is not entitled to half as it is normally considered that the person who gives full time child care is prohibited from working. If the original paln was for her to stay at home while you worked she will be enitiled to half AFAIK.

It kind of depends on what kind of terms you are with her. It sounds quite agreeable but I have seen it seem reasonable but be something else. One friend paid the mortgage while she lived there (no kids) for 2 years and she insisted on half and then got a friend real estate agents to say the house was worth more to push up the average price of three valuations. He was renting while she lived there and she was working full time.

jeronimo

Hi Fill,

Many thanks for your input.

Interesting that the state considers 100k as a “small amount”!! (Any chance they would consider it small enough not to pay capital gains on? I don’t expect to make anything near that amount, or half come to that, and I will be left with no house or hope of being able to buy another one…).

I’m afraid you’re right about things looking reasonable when they are anything but… The terms are not good at all, but I suppose that is usual in these circumstances. As I say, we (according to the deeds)/ I (in reality) bought the house about five years ago. Our child was school age. My ex didn’t want to work and I respected that totally. Although our extremely sparse economy would have benefited greatly, I never questioned her choice. After less than a year she walked out and went back to Dublin with another man, leaving our son with me. I managed till the end of the summer holiday period but as soon as the holidays finished the only feasible (at least it seemed so at the time as I tried to muddle through) was for our son to go and live with her when I went back to work – which had to be Dublin as she was there and I had to be near him. I consider myself lucky I was able to live with my parents. After a year the new boyfriend threw them out and she went into subsidised housing. The land lawyer considered the amount of time she lived in our house as homemaker, the fact she walked out, and the fact she never made any kind of contribution to the purchase or upkeep of the house, neither then nor since. She (the lawyer) seemed extremely informed and clear on this, but I agree that the law is full of surprises, not all of them pleasant…

Thanks again for your interest.

J.

latenia

Well I am a former Revenue official (seriously) so I think I would know. I just don't see how it would appear to be anything other than his PPR going on the information which they will have.
He makes a declaration that this is his PPR; they give it a cursory glance before stamping the form-end of story. The only other information they have to hand (mortgage interest relief details) merely corroborates this.
This is all moot anyway; there is no strict interpretation of what constitutes someones PPR and the OP would easily qualify.