Selling 2nd property - capital gains tax question

Gegerty

I'm in a very fortunate situation at the moment. Both my Fiancee and I have our own properties. I bought a house and she bought an apartment before we both met. We've been living together in my house for 2 years now and she is renting out her apartment. Since we got engaged there is no real need for the apartment and the rent falls short of the mortgage by €100 p.m, not to mention insurance and maintenance fees. We reckon its now time to sell.

My question is, do we need to sell before we get married in order to avoid capital gains tax? Obviously we will let on that she is still living there and therefore an owner/occupier. Does marraige change this?

Andrew Duffy

But the property has been rented, and therefore is an investment. You can't have it both ways. By the way, was it less than five years after purchase that the apartment was rented out? Was the stamp duty clawback paid?

Gegerty

Andrew Duffy wrote:

But the property has been rented, and therefore is an investment. You can't have it both ways. By the way, was it less than five years after purchase that the apartment was rented out? Was the stamp duty clawback paid?

She's not making a profit, in fact its a huge liability, so it's not an investment. There's no rented income to be taxed because she's making a huge lose on it. The 5 year stamp duty thing is another issue I need to look in to, if it needs to be paid then so be it.

kippy

I dont think investments are classed as something that "is making money or you are making an overall gain on"

Gegerty

Yea I agree but also I don't think having to sell your home because you're marrying someone who has a house can be classified as an investment either.

Gegerty

Also another question, what if we were to keep the apartment and just call it an investment, which it would be if we were keeping it, and then we decide to sell my house and move somewhere a few years down the line. Are we going to have to pay gains tax on the house? Its the same scenario just reversed. Who is to say whether the house is the investment or the apartment is the investment?

NavanJunction1

In thi situation you would be liabal for Capital Gains Tax on the period for which the property was rented out.

Tax on the amount income per annum is a different thing, whereby you/she should be registered as self emplyed etc for that. If the rent was less than the mortgage you will not have to pay tax on the rental income aspect.

However, you will be liabal for the increase in value over the rental period through CGT. And then there is also the stamp duty issue outlined earlier..

Being married has nothing to do with this as it all relates to whether it was your principle primary residence, rather than what your motivation was when you/she bought the apartment.

Only benefit that I can think of in relation to being married is that property can be transferred between spuses without stamp duty being paid..

Again, check it out with an accountant or check it out with the revenue or on oasis..

The_Conductor

Gegerty wrote:

Also another question, what if we were to keep the apartment and just call it an investment, which it would be if we were keeping it, and then we decide to sell my house and move somewhere a few years down the line. Are we going to have to pay gains tax on the house? Its the same scenario just reversed. Who is to say whether the house is the investment or the apartment is the investment?

First of all- if you were to keep the apartment and "call it an investment" you would be subject to stamp duty clawback- as stamp duty would have been paid on it at the lower level as the principle residence of a First Time buyer. Residency determines which property is classified as an investment- nothing else. If you are living in it- it is your principle residence- while you may consider it an investment, the revenue commissioners consider it as the roof over your head. On the other hand- if you are not living in the property- irrespective of whether you are making a profit on it or not, it is classified as an investment. Who is to say which is which- quite simply- the Revenue Commissioners, thats who......

NavanJunction1 wrote:

Tax on the amount income per annum is a different thing, whereby you/she should be registered as self emplyed etc for that. If the rent was less than the mortgage you will not have to pay tax on the rental income aspect.

I am not sure what NavanJunction1 is trying to say here. The fact that your rental income is less than your mortgage has *no* bearing whatsoever on whether you have a tax liability. I assume that your fiance is claiming tax-relief-at-source on her mortgage (and probably at the wrong rate, as she is not an owner occupier)- so any income from rental of the property whatsoever is taxable income. I have been assured by a tax consultant that mortgage repayments (including the interest components thereof) are no longer tax deductable (with the exception of certain tax designated properties- Section 22/44 properties etc....).

As for your fiance being registered as self employed- thats nonsense. She should make an annual tax return, yes, but there is no need whatsoever for her to be self-employed.

Re: Marriage- as a married couple you have the right to
1) Continue with individual tax returns
2) Make joint tax returns
3) Make an annual return (under the higher earner and pay PAYE at the nominal rate on the second income- this works out well if you have expenses which are deductable at the higher rate (such as flat line deduction of furniture and fittings in a rental property.......)
Talk to a tax consultant on this- there are lots of ways that are totally legal manners of minimising your tax exposure as a married couple.

I really think you need to have a meeting with a tax consultant to run through possible scenarios in your own mind.

Shane

Gegerty

Thanks guys. I will meet with an accountant to discuss it. Basically though, what you are saying is that selling the apartment before we get married is not going to help regards capital gains tax?

I know she is renting it out and therefore should be registered, but this is not the case. We got advice on this before hand and were told it will never be an issue so long as we're not making a profit. If we were to sell it before we get married we will most likely stop renting it out and she can move back in, tax man will no nothing about it.

I suppose what I'm asking is can we do this while we're married or will they turn around and say wait now a second your husband owns a house so your apartment is now considered an investment.

garred

smccarrick wrote:

I have been assured by a tax consultant that mortgage repayments (including the interest components thereof) are no longer tax deductable (with the exception of certain tax designated properties- Section 22/44 properties etc....)

Don't think this is correct as told by an accountant. At the end of the day the interest is a cost, as would be repairs, and is tax deductable....however my accountant may be wrong.

Just out of curiousity...if you were to have an investment property rented for a few years but you wanted to sell, is it true that if you move into that property for a year you don't pay CGT?

The_Conductor

Gegerty wrote:

Thanks guys. I will meet with an accountant to discuss it. Basically though, what you are saying is that selling the apartment before we get married is not going to help regards capital gains tax?

http://www.revenue.ie/services/ind_buy1.htm#10

10. If I sell my house will I have to pay Capital Gains Tax?

No. If the house (including grounds of up to one acre) has been occupied as your sole or main residence throughout your period of ownership you will be exempt from capital gains tax on the sale.

I.e. the period of non-residency voids this......
If you try to make out that she has been permanently resident there, you may get away with it, or you may not. If a previous tenant were to query it (e.g. if they were claiming rental relief from the Revenue Commissioners, which they are entitled to), and you got caught- the penalties for a false declaration would likely be far higher than the tax demand ever would have been.

Gegerty

smccarrick wrote:

http://www.revenue.ie/services/ind_buy1.htm#10

10. If I sell my house will I have to pay Capital Gains Tax?

No. If the house (including grounds of up to one acre) has been occupied as your sole or main residence throughout your period of ownership you will be exempt from capital gains tax on the sale.

I.e. the period of non-residency voids this......
If you try to make out that she has been permanently resident there, you may get away with it, or you may not. If a previous tenant were to query it (e.g. if they were claiming rental relief from the Revenue Commissioners, which they are entitled to), and you got caught- the penalties for a false declaration would likely be far higher than the tax demand ever would have been.

OK thanks. I'll have to get advice on the risks involved.

Gegerty

smccarrick wrote:

http://www.revenue.ie/services/ind_buy1.htm#10

10. If I sell my house will I have to pay Capital Gains Tax?

No. If the house (including grounds of up to one acre) has been occupied as your sole or main residence throughout your period of ownership you will be exempt from capital gains tax on the sale.

I.e. the period of non-residency voids this......

3. What is a sole or main residence?

A sole or main residence is the residence which is your home for the greater part of the time. It does not have to be owned by you e.g. your parents’ residence may also be your sole or main residence, if you normally live there.

So period of non-residency has to be less than period of residency. My question has been answered anyway, marraige plays no part in it.

Thanks to all for your advice.

Victor

Gegerty wrote:

Since we got engaged there is no real need for the apartment and the rent falls short of the mortgage by €100 p.m, not to mention insurance and maintenance fees. We reckon its now time to sell.

The rent may fall short, but there is still a profit as part of the rent is made up of capital repayment.

NavanJunction1

If it isn't register, and she hasn't registered for Tax, then there will not be a bill coming in to her unless she does. Until then there will be no tax request, either cgt or on the rental aspect

NavanJunction1

smccarrick wrote:

As for your fiance being registered as self employed- thats nonsense. She should make an annual tax return, yes, but there is no need whatsoever for her to be self-employed.

When you make landlord tax returns as an individual it is catagorised as an income. No you aren't working for a living but it is an income and you are treated as if you are self employed.

When you register as a landlord with the Revenue, you fill in a form which details the nature of the tax return you will make. You have to tick what is applicable and what is not (if you have employees, if you want to register for VAT etc) , but it is the same form you would fill in if you were self employed, and you make returns on the rental income in the same way.

It's not rubbish - check.

Re marriage, that is irrelevant. Either the property is rented out or it isn't.

The_Conductor

NavanJunction1 wrote:

If it isn't register, and she hasn't registered for Tax, then there will not be a bill coming in to her unless she does. Until then there will be no tax request, either cgt or on the rental aspect

Unless Revenue put two and two together when her tenants try to claim a tax credit on their rental outgoings. They are totally entitled to claim a maximum of Euro 254 p.a. irrespective of whether the owner is registered or not. All they have to do is give the address of the property, the name of the landlord and details of their payments to the landlord and after a short period (about 6-8 weeks at present) all is done from their end. While the Revenue Commissioners may be short of investigative staff- you are running a risk of getting caught out here.

Re: Marriage- being married is irrelevant to whether the property is being rented out or not. It does however potentially have an impact on the manner in which the rental income is treated though- as there are 4 manners of assessing a married couple- and it would make sense to investigate which is most tax efficient, that is the point I was making. If you can offset credits at the higher rate on a larger income, it makes far more sense than dissipitating them at the marginal rate on a lower income. There are no difficulties in doing this. Pre-marriage courses often have small economic classes detailing how to make the most out of being married from the taxman (aside from the rules in place the year that the marriage occurs). There are quite a few little used instruments of interest in there.....

NavanJunction1

Sorry - had the rent relief there but must have deleted it before posting.

To be honest, her income liability will be small or non-existant judging by your posts, but the cgt is a different story.

also if she claimed mortgage relief she may be hit for a refund. rather she will be if it was claimed trs

again tax advisor is best option