RSM Ireland

Property related tax issues

In this article Damien O’Sullivan deals with some common tax queries that arise in relation to property transactions.

I am hoping to build an extension on a rental property I own. How much, if any, of the cost can I write off against tax?

The building of an extension onto your property is not deductible for income tax purposes, as it is a capital expense, i.e. it is enhancing the value of your property. As such, this expenditure would be treated as enhancement expenditure for capital gains tax purposes. If you disposed of the property in the future, you would be entitled to a deduction for any expenditure incurred when building the extension in arriving at the chargeable gain.

Tax relief is however available under the Home Renovation Incentive (HRI). The HRI Scheme provides for tax relief for homeowners and landlords by way of an Income Tax credit at 13.5% of qualifying expenditure on repair, renovation or improvement works carried out on a main home or rental property by qualifying contractors. In order to qualify for the HRI scheme,

  • works must be carried out between 15 October 2013 and 31 December 2016.
  • qualifying expenditure is expenditure subject to the 13.5% VAT rate.
  • The works must cost a minimum of €5,000 including VAT.
  • The maximum expenditure that will qualify for relief is €34,050 including VAT.

The credit is payable over the two years following the year in which the work is carried out and paid for.

My parents are about to dispose of a rental property, which they acquired many years ago, at a sizeable profit. Are there any tax reliefs available?

The disposal of the property will be liable to Capital Gains Tax (CGT). CGT was introduced in Ireland in 1975 and, in short, it is a tax on gains arising from the sale of capital assets. The gain to be taxed is arrived at by deducting the cost (plus any enhancement expenditure) of the asset from the sales proceeds, and applying the tax rate to the taxable gain to determine the payable amount.

As this was a rental property there are no specific reliefs available but given the length of ownership two general reliefs that may apply are Principal Private Residence (PPR) relief and indexation relief.

  • PPR relief provides that if the property had been occupied by your parents as their principal private residence at any time in the past then the portion of the gain that relates to that period of occupation (as calculated on a time apportioned basis) will be exempt from tax.
  • Indexation provides relief for the effect of inflation over the period of ownership of an asset. It was introduced in 1978 and the rates have been set by Revenue for all years up to 2003. As such, indexation is intended to eliminate the part of the gain attributable to inflation.

My mother is about to gift me an apartment she owns in Dublin. Are there any tax implications?

A gift of the apartment by your mother is a disposal for Capital Gains Tax (CGT) purposes. Irish Tax legislation states that where a property is transferred by way of a gift to a connected party the transfer is deemed to pass at market value. Therefore, while no consideration may be received for the property, your mother will be deemed to have received consideration on disposal equal to the market value of the property. A liability to CGT arises when the proceeds or deemed proceeds are greater than the original purchase price plus enhancement expenditure (after indexation). The current rate of CGT payable on this deemed gain is 33%. Principal Private Residence Relief could apply to the sale if the apartment had ever been your mother’s main residence.

The receipt of the apartment from your mother is a gift for Capital Acquisitions Tax (CAT) purposes. A liability to tax may arise where the value of the benefit is over a certain limit or threshold. The threshold applicable to a gift from a parent to a child (Group A) is €310,000. A gift below this value will not give rise to a CAT liability provided you have not previously received a gift within this group (i.e. a previous gift from either parent). The small gift exemption should apply resulting in an exemption of the first €3,000 of the taxable value of the gift. CAT will be payable at 33% but where CGT and CAT are payable on the same event a credit for the CGT paid may be claimed against the CAT liability in certain circumstances.

Please note Dwelling House relief may apply to the gift of residential property provided certain conditions are met in advance of the disposal. The principal conditions are:

  • You must have occupied the property continuously as your main residence for a period of 3 years immediately prior to the date of the gift;
  • You must not, at the date of the gift, own or be beneficially entitled to any interest in any other dwelling;
  • You must occupy the property as your main residence for a period of 6 years commencing on the date of the gift.

This relief, however, applies only to the CAT liability and your mother will still have address any CGT liability that arises.

Stamp Duty

Stamp duty is payable on the transfer of residential property at a rate of 1% of the market value on the first €1,000,000 and 2% on the excess over €1,000,000.

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