I want to sell my €400,000 rental property to my daughter for €150,000. What are our tax liabilities?
Question: In 1998, I bought a rental property for IR£120,000. It is now valued at €400,000. I now wish to sell this house to my daughter for €150,000 as her family home, therefore gifting her €250,000 in equity. What are the tax liabilities for both of us? Kevin, Drumcondra, Dublin 3
Answer: We have to deal with two different taxes here. Capital Gains Tax (CGT) for you - and gift tax for your daughter. First, I will deal with the CGT position for you as parent.
The gift to your daughter is considered a sale at market value, so assuming that the €400,000 is fair market value you have a gain of €215,350. This gain is calculated as follows: The deemed sale price of €400,000 minus inflation relief of €184,650 to allow for inflation. (Inflation relief is available as the property was purchased in 1998. If the property was bought before April 6, 1998, the inflation relief would be slightly higher.)
This leaves you with a gain of €215,350 from which you can deduct your personal CGT exemption of €1,270. Your taxable gain is therefore reduced to €214,080 and as CGT at a rate of 33pc is due on that gain, your CGT bill comes to €70,646.
Bear in mind that if the property is in joint names with your partner, two personal CGT exemptions can be claimed - which would reduce your taxable gain by a further €1,270.
Furthermore, if you have unused capital losses from earlier years - or have an asset which would incur a loss on a sale and which you could sell now, such losses can be used to reduce the taxable gain.
You can deduct legal fees and any other costs you incur for the transfer of the property to your daughter - which will reduce your taxable gain. Your daughter will incur 1pc stamp duty and her own legal fees - but these are her costs and you cannot claim them as a deduction.
The position for your daughter under gift tax rules is very straightforward. She is considered to get a gift of the difference between what she pays you for the property - and the market value of the property. As the market value of the property is €400,000 and your daughter is paying you €150,000, €250,000 is the value of the gift she has received.
As your daughter is entitled to an annual small gift allowance of €3,000 from each of her parents (assuming the rental property is owned jointly by you and your partner), this exemption reduces the value of the gift to €244,000. Assuming your daughter has not received any other gifts from you or her mother since December 5, 1991, the full parent-to-child gift tax-free threshold will be available for her. This is currently set at €310,000 so is well over the deemed gift of €244,000.
If your daughter did not pay you anything for the property, she would still have no gift tax to pay as you can offset the CGT you pay against the gift tax that your daughter would owe. So unless you specifically need the €150,000, you might like to consider this but you should obtain expert tax and financial advice before doing so.
I will now outline the tax position if your daughter did not pay you anything for the property. The deemed gift would be €400,000. Once you deduct €6,000 from this for the small gift exemption (assuming the property is owned jointly by you and your wife and therefore your daughter is entitled to a €3,000 tax-free gift from each parent), and the €310,000 tax-free threshold for gifts, the value of the taxable gift received by your daughter would come to €84,000.
As gift tax is paid at a rate of 33pc, your daughter's gift tax bill in this case would come to €27,720. As this €27,720 is less than the CGT that you would have to pay, your daughter would pay no gift tax. However she must keep the property for at least two years.
Also in these situations, if your daughter is married, be aware that the gift must be to your daughter only. If, for example, you transferred the house to your daughter and her partner, then you are making two separate gifts of 50pc each. As one of them (that is, your son-in-law) is to a stranger for gift tax purpose, his tax-free threshold for gifts is only €16,250. If this applied in your case, your daughter's partner would have a gift tax liability of €33,908. However, the CGT that you are paying would also cover the partner's gift tax.