The disposal of your principal private residence plus surrounding gardens up to a maximum of one acre is exempt from capital gains tax. However if the price you receive for the property reflects development value then part of the gain is liable for tax. This frequently arises where part of a garden is sold off. While this sounds relatively straightforward there are in fact many different situations that arise in practice that require a more detailed consideration of the relief.
To qualify for this exemption you must buy and occupy the property as your private residence. There have been many court cases on this point over the years. An intention to use a property as a residence is not sufficient and if you occupy the property for a very short period you may not qualify for the relief. For the majority of cases no difficulty will arise in this particular area. The exemption covers your house plus gardens up to a maximum of one acre.
If the garden or part thereof is sold without the house the sale will not qualify for full relief if the area of the garden sold is to be developed. This tends to be the norm in this type of situation. If the garden area exceeds one acre then the gain applicable to the excess area will be liable for tax.
Sometimes parents will transfer part of their garden to a child to build a house on the site. If the value of the site does not exceed €500,000, for transfers from the 5th December 2007, no tax will arise on the disposal to the child provided all the other conditions for this relief are satisfied. The area of the site cannot exceed one acre.
2.1 What happens if I sell my residence at a Loss
Unfortunately if your house is sold at a loss you cannot use the loss for offsetting against other taxable gains.
If the house was let out for a number of years during your period of ownership then a proportion of the loss on its sale could be used for offsetting against other gains.
2.2 How Many Residences Can I Have?
Only one property can qualify as your principal private residence and if you have more than one you have to notify the Revenue which one is your principal private residence for Capital Gains Tax purposes. This notification must be made within two years of the beginning of the period of acquisition of the second residence. Assuming the facts of your circumstances support the property nominated by you no difficulties will arise. If the facts do not support your case you may have to negotiate the matter with the Revenue to reach agreement.
A common situation these days is where one spouse works in Dublin Monday to Friday and lives in an apartment they own in Dublin. The family live down the country in a house owned by them. Which property is the principal private residence? More likely than not the house down the country. However an argument could perhaps be made that the apartment is the principal private residence but might be difficult to sustain.
Couples are getting married later in life these days and quite often each of the couple will already own a private residence prior to marriage. As a married couple they are only entitled to have one principal private residence for capital gains tax purposes. Let’s assume that they live in one of the properties and let out the other one for a few years and then decide to sell one of the properties. If they sell the property that was let at a gain then part of the gain will be taxable. However if they sell the property that they lived in this should be exempt from tax as it was always used as a principal private residence. They could then move into the property that was let and continue to use it as their private residence. On any subsequent sale of this property full Principal Private Residence relief will not be allowed as it was not always used as a private residence.
TAX SAVING TIP
Like a lot of tax rules there is one exception to the rule that you can only have one principal private residence. A property provided rent free to a Dependent Relative can also qualify for the principal private residence exemption. The property must be the sole residence of the dependent relative. For married couples each spouse may have a property qualifying for the dependent relative relief rule.
Trustees of a settlement can also qualify for the principal private residence relief where a property owned by the Trustees is used by a beneficiary of the Trust as their principal private residence.
2.3 How Often Can I Qualify for this Relief?
The simple answer is as often as you like. However, tax matters are not always simple. Consider the position of a builder developing a new residence, then moving into it and selling his old residence. After a while he builds another new house and moves into it, then sells the second one and so on and on for a few years. The Revenue might argue that the motivation for continually moving was to make a quick profit and the relief might not be allowed. Tax advisors would not necessarily agree with the Revenue approach. Situations like this fall or stand on their own individual merits. We can provide detailed advice for this type of situation by consultation for which a charge will arise. Based on past experience the Revenue consider that the minimum period of actual residence in the property should be twelve months in order to qualify for the relief. There is no specific rule governing this matter and each case will depend on its own circumstances.
2.4 What Happens if I Have to Work Away from Home?
If you are employed abroad and during that period your private residence is let out this will not affect the tax exemption provided you occupy the property on your return as your principal private residence.
The same rule applies subject to a maximum period of four years absence if you are prevented from occupying your residence due to local employment conditions.
2.5 How Does the Tax Relief Work?
If you sell your private residence you must calculate the gain in the normal way. If your property has always been occupied as your private residence and no development value reflected in the sale proceeds then the gain is not liable for tax.
However, if you did not always use the property as your private residence then part of the gain may be liable for tax. In these circumstances and assuming you do not qualify for relief on the working away from home rule explained above then a fraction of the gain will be taxable. This is calculated as the period of non-occupation over the total period of ownership. If you brought the property prior to 6/4/1974 you ignore any period of ownership prior to this date.
If you owned the property for say 10 years and initially occupied it as your residence for 5 years and let it out for 5 years then four-tenths of the gain is liable for tax. The first 5 years and the last year are treated as your period of private residence use and that part of the gain is not taxable.
When you have used a property as your private residence you are entitled to treat the last 12 months of ownership as being part of your private residence period of use.
House purchased 2003
Sold in 2013
Used as residence for 5 years
The time apportionment rule for the period of ownership as explained above may be changed where the calculation proves unjust and/or unreasonable. This is allowed where there is a significant change in the house or its use.
The rules can also be applied in a different way where a site is acquired and a residence built on it. If the residence is not complete and occupied within a year of acquiring the site then on a sale of the completed property part of the gain may be taxable.
We can provide further advice on this matter by way of consultation.
2.6 Do I Have to Tell the Revenue about the Sale of my Residence?
Yes you must disclose the sale on your tax return form and claim the benefit of the private residence exemption. If part of the gain is liable for tax you must ensure you pay the tax due on time and complete your tax return within 10 months from the end of the year during which the property was sold. This is very important for PAYE earners as they might not be aware of the rules regarding our self-assessment tax system. Capital gains tax is payable under our self-assessment rules and the onus is on everybody to ensure that they comply with them.
2.7 What is Development Value?
This can be a complex matter. What it really means is that somebody is prepared to pay you more for your property than it is worth as a normal residence. A typical situation is a builder buying your house with the intention of redeveloping the property e.g. conversion to apartments or replace existing house with two or more houses. In effect the extra premium paid over the normal residential value is liable for tax. This is different to a situation where a private individual buys an old house and completely redevelops the property into a new private residence for own use. Its possible that in this type of situation it could be argued that the price paid for the old property reflected the redevelopment opportunity. However in our experience this does not arise in practice.
In cases where development value applies you have to make two calculations. First you calculate the gain in the normal manner. Second you calculate the gain substituting the normal residential value for the actual sale proceeds. You pay tax on the difference between these two figures. See example 2 below for reference.
If the purchase price you paid for the property or its market value at 6/4/1974 whichever is later reflected development value you cannot increase this element of the cost price/value at 6/4/1974 for inflation. The incidental costs for disposing of the property e.g. legal fees, auctioneer etc are apportioned between the two methods of calculation.