Your questions: Must I pay tax on the derelict house I inherited from father, which I sold at a loss?
Published 15/05/2016 | 02:30
I inherited a derelict vacant house from my father which was valued at €60,000 at the time of transfer. I later sold this property last year for €30,000. Am I liable for Capital Gains Tax (CGT)?
As the sale came close to the payment deadline for CGT, in my haste I thought I had a liability and submitted payment to Revenue. Is this correct as technically I made a loss. If I have paid incorrectly, I assume I can seek redress from Revenue?
Sean, Dungloe, Co Donegal
It would appear that the property was valued at €60,000 at the valuation date (that is, at the time that you received the inheritance which is likely to be the date of the Grant of Probate). This was your base cost for the purpose of assessing capital gains or losses arising on the disposal of this property in the future. When you inherit an asset, it is the value of that asset at the valuation date that is taken into account.
The subsequent disposal of the property for €30,000 would have therefore created a capital loss. This should not in itself have created a CGT liability in your name and you are correct in identifying this as a mistake made by you.
In addition, the loss itself can be offset against chargeable gains that arise on the disposal of other capital items such as land, property, shares and so on. This loss must be offset against gains arising in the same year and if this is not possible, the loss can be carried forward to be offset against the first available capital gain arising in future years.
I would recommend that contact is made with your local Revenue office outlining the circumstances and the basis for the mistake that has been made. A refund of the CGT should be paid out by Revenue in these circumstances.
In May 2006, we agreed to purchase a second house. In April 2007, we completed the purchase at a cost of €295,500. In addition we paid approximately €17,500 in legal and other fees. We had to borrow €140,000 to complete the purchase. The house was included in an Urban Renewal Area/Designated Towns scheme under Section 23 of the Finance Act. We got tax relief on bank interest.
We never used the house as a family home but had tenants in it and got tax relief on the rent and maintenance. In March 2016, we sold the house for €140,000 and had to pay the usual legal fees and so on. We lost approximately €155,000 - excluding legal fees. Considering our loss, will we have to refund some or any of the tax benefits we received over the years?
Luke, County Laois
It would appear from your question that you agreed to buy the house in 2006. It would also appear that the property met the requirement that at least 15pc of the construction was completed before December 31, 2006 - thereby entitling you to the tax relief.
As the house was sold before 10 years had passed from the point it was first let out by you to tenants, the sale should in fact result in a clawback of the tax relief claimed by you under this scheme. Conditions of this relief include retaining the property for 10 consecutive years after the first letting.
As you would initially have been deemed under this scheme to have availed of a rental loss in the year that the property was first let out, this rental loss will now be clawed back.
The question seems to ask if there is a way that the capital loss that has arisen on the disposal of the property can be offset against or utilised in replacement of, the rental profit (and the associated income tax liability) that the clawback of this relief will generate.
The answer is no. The sale of the property creates a capital loss. Clawback of the Section 23 scheme relief generates a potential income tax liability. Capital losses cannot be offset against income tax. They are two different taxes.
However, capital loss generated by the sale of the Section 23 property can be offset against gains that arise on other chargeable assets disposed of in 2016. Should other capital gains to offset against this capital loss not exist in 2016, it is possible to carry this capital loss forward (or any unused part of it) to be offset against the first available gains arising in future years.
You are correct in identifying that you would have availed of tax deductions for expenses incurred such as mortgage interest (75pc of which can currently be claimed in tax relief), maintenance, insurance, management fees and other costs (this list is not exhaustive). Should the property have generated profit in excess of these expenses during that nine-year period, the likelihood is that you will have availed of Section 23 relief on this income and therefore a clawback of the relief is likely to arise.
You should get your tax advisor to determine exactly how much of a clawback you face.
I am considering using the dwelling house tax exemption to pass a property onto my son. My son has lived in this property for three years. I am concerned at the costs which my son could face should I transfer the property to him. What kind of legal fees, stamp duty and transference fees could he face if I give him the property? Are there any other costs that he should be aware of?
Pat, Thurles, Tipperary
The dwelling house exemption is a valuable relief as it could prevent your son from being hit with a hefty Capital Gains Tax (CGT) bill should you transfer your property to him.
It sounds like your son is living in a property that you own but which is not your personal principal private residence. If this is the case, then the transfer of the property to your son may create a CGT liability in your name. The CGT bill you face will depend on the increase in value of the property from the date that you first acquired it - to the market value of the property at the date of transfer to your son.
In addition, your son will have to pay stamp duty of 1pc on the market value of the property. With regard to legal fees and so on, these are unavoidable costs and vary from solicitor to solicitor. My advice would be to shop around to establish the cost of such services.
Should you delay the transfer of the property so that your son receives the property through an inheritance, this will have tax implications. First, there is no stamp duty on receipt of an asset through an inheritance. Second, should the value of the property have grown in the intervening years from when you first acquired it, CGT is not assessable on this gain. Third, should your son receive this property as an inheritance and meet the criteria for the dwelling house exemption, it is possible for him to receive the property free from Capital Acquisitions Tax (aka inheritance or gift tax) under this relief.
There are a number of intricacies around the dwelling house exemption. For example, let's say your son inherits the house that he is currently living in from you and he is also entitled to inherit an interest in either your own principal private residence or any other residential property that you own. Although this may save him stamp duty and eliminate any potential exposure to CGT in your name, the fact that he is now inheriting an interest in more than one dwelling house has the potential to disallow the relief in its entirety.
An analysis should be carried out to ensure any stamp duty or CGT saved does not create a larger CAT liability in your son's name. Though legal fees are a consideration, I think these may be the lesser of the costs to be considered given these potential set of circumstances.
Email your questions to email@example.com or write to 'Your Questions, The Sunday Independent Business Section, 27-32 Talbot Street, Dublin 1'.
While we will endeavour to place your questions with the most appropriate expert to answer your query, this column is a reader service and is not intended to replace professional advice.
Chartered tax advisor, Priority Tax Consulting
Sunday Indo Business