Tax Free or Not Tax Free, That is the Question
The property market has been headline news for the past few months, with experts constantly trying to predict what is going to happen. While everyone is focused on what the property market may or may not do, very little consideration is being given to the tax implications of selling your home. Whether you are trading up, selling your investment property or part/all of your home to a developer, the tax aspects of the sale should be considered in detail. It is not always as straightforward as you might think.
Most people (especially taxi drivers and your local bar man!) are aware of the exemption from capital gains tax when you sell you principal private residence (PPR) i.e. your main home. The purpose of this article is to dust off the cobwebs on a number of situations where this relief can and cannot be claimed that may be overlooked with all the hype surrounding the price that your home may get.
Overview of the Relief
In general PPR relief (contained in section 604 TCA 1997) allows a person to sell their home without a capital gains tax charge on the basis they have lived in the property throughout their period of ownership.
If you have two houses then you choose which house is your main home for the purposes of the relief, subject of course to Revenue approval. Unfortunately you cannot have your cake and eat it, you must choose which house is your main home and notify Revenue of this within two years of purchasing the second home – you cannot wait until you sell one home and then decide.
The relief applies to a sale of the house plus one acre of grounds. It is important to point out that the relief is for one acre of grounds plus the house. This is an important fact which is forgotten in a lot of situations. There is a tendency to only think of the one acre and if a client comes to you with grounds of over one acre to automatically assume that there will be a tax charge. This tax charge could be reduced or avoided if the acreage provided by your client also includes the footprint of the house.
There are a number of hidden traps in the relief that people should be aware of when selling their house, as it may be too late to do anything about it once the deal is done.
Sale of Part of Land
The PPR relief extends only to the house plus one acre of grounds that the person has used for their own enjoyment and personal use with their home. There are a number of situations where you may assume the sale of the garden is tax free but under the legislation this is not the case.
-We all know that if part of the house has been used for business purposes or rented out, then you are not entitled to the relief on that portion of the house. You may not remember to ask the same question about the grounds of one acre. If a homeowner has been renting or built on part of the garden or has used it for a business purpose then he has not been using this portion of the garden for his personal use. Therefore the sale of this portion of the garden, either on its own or with the house, will be liable to capital gains tax irrespective of when it is sold and the total acreage of the garden. This point may be forgotten when giving advice on this relief.
-The timing of the sale of land can be crucial in deciding the tax treatment. If a homeowner is selling his home plus one acre and meets the various conditions for the relief you would assume he can receive the entire proceeds tax free. This may not always be the case and the timing of the sale can inadvertently disqualify you for the relief. For example, if a homeowner was selling the house plus ½ acre to a third party and the other ½ acre of his garden to his next door neighbour, he has to structure the sale carefully to obtain the relief on both sales. In order to get PPR relief on the sale of the ½ acre to his neighbour it is crucial that this sale happens before the house is sold to the third party. To qualify for PPR relief, the land must be used with the home. If the home is sold before the plot of land, then the plot of land cannot be ‘used with the home’ and will not qualify for any relief. Many people focus on the one acre allowance and forget that the one acre must be used with the house to qualify for tax relief.
-It is a common assumption that if a person sells less than one acre of land, while retaining their house, then this sale qualifies for PPR relief and as such is free from tax. As with everything in tax, it is not that simple! If the total size of the garden is less than one acre and you sell part of this acre while you own the house, then assuming that you meet the various other conditions for the relief, the sale of this piece of land will be free from tax. On the other hand, if the total size of the garden is greater than an acre, then in most cases selling off part of the garden will not qualify for relief or may only get partial relief. This is because the relief for one acre relates to the one acre immediately surrounding the house. Therefore, if you have a garden that is 2½ acres and you sell ½ acre, this will be deemed to be out of the part of the land not necessary for enjoyment of the house and you will be treated as retaining the acre which may attract the PPR relief.
Location of Land
Although the relief extends to one acre of land it is important that this acre is used with the home. If a part of the land beside the home has never been used as part of the garden then the gain on this part of the land will not qualify for the relief.
If you are considering selling your house and an adjacent plot of land, it would be worth using the plot as part of the garden for the home and incorporating it into the existing garden (subject to the one acre restriction). Then it may be possible to obtain some relief on the sale of this plot of land.
On a positive note, Revenue have agreed that a plot of land slightly separated from the house (even if it is separated by a road) should qualify for the relief if it is disposed of with the house and would generally be regarded as part of the garden enjoyed with the house.
Any development land gain is specifically excluded from the relief. This means that even if the house has been the person’s main home and the garden is less than one acre there may still be a tax charge if the sale price includes some development value.
Most people would correctly realise that when a house is sold to a developer the sale price will generally include development value and disallow PPR relief on some of the proceeds. The problem arises when the house is sold to a third party who is going to use the house as their home. The fact that some of the sale price could relate to the development value can be forgotten in these circumstances. As a basic rule, you must ask the question ‘What would someone pay for this property if there was no possibility of ever obtaining planning permission for development on the site?’ If the answer would be a lower figure than the sale price for the house then the PPR relief must be restricted to the lower figure, no matter who the buyer is.
Absence from Home due to Employment
In order to qualify for the full relief you must have lived in the house as your main residence for the entire time you owned it.
Often individuals may have lived elsewhere for a time due to the requirements of their employment. The legislation does allow for PPR relief to be preserved during periods spent working elsewhere but the conditions that must be met are complex and contain many traps for the unwary.
If you are required to live elsewhere as a result of your employment, you must live in the property both before and after this period of absence to claim PPR relief for the period of absence. If you worked in Ireland, then you can claim a maximum of four years in total away from the property as periods you lived in the property. If you worked abroad, then there is no limit on the amount of time you can claim relief for while working abroad.
In relation to a foreign employment, the conditions to qualify for the deemed period of occupation may be stricter than the conditions for an Irish employment. If you work abroad, to qualify as a deemed period of occupation, it must be a period ‘throughout which the individual worked in an employment or office’. This could lead to unfairness if an individual worked abroad for a period of time and then spent some time travelling, e.g. the individual worked abroad for three years and then spent a further six months travelling. Most advisors would assume that the individual has preserved their PPR relief for the three years that they spent working and would lose the relief for the six months they spent travelling. There is an alternative argument that the individual would not preserve any of their PPR relief for this 3½ year period as they were not working throughout the entire period abroad.
In order to be able to claim the relief for these periods away from the property, you must have lived in the house as your home both before and after the period of absence. Additionally, you cannot have any other house eligible for the relief throughout the period of absence. In relation to this latter point, you do not have to have claimed the relief on another property; the mere ownership of a property that could qualify for the relief will disqualify you.
A problem may arise where a husband and wife move abroad as a result of the husband’s employment. Under the PPR relief legislation, the period the husband spends abroad will qualify for PPR relief provided that the husband returns to the property when he comes back to Ireland and he does not own a second property that would qualify for the relief while he is abroad.
In this situation it might be easy to forget about the wife’s circumstances if the property was sold at some point in the future. The deemed occupation of the property only applies if you are absent from the property as a result of your employment. In this case, the wife is absent from the property as a result of her husband’s employment and as such the deemed occupation of the property does not extend to the wife so she may have a taxable gain when the property is sold.
As this gives an inequitable situation, there is a Revenue concession that if a husband and wife are living together and are absent from their home as a result of the employment of one spouse, then they will extend the deemed occupation to the other spouse as long as neither spouse had another house eligible for the relief throughout the period of absence.
There is a potential pitfall with this deemed period of occupation for self employed individuals as it only applies to employees and office holders. If a self employed individual worked abroad for a number of years, they would not be entitled to preserve their PPR relief for the time spent working abroad. Alternatively, if the individual set up a company and became an employee of it before working abroad then they would preserve the PPR relief, providing all the other conditions are met. Therefore, if a self employed individual is thinking about working abroad, they should consider the merits of setting up a company in order to preserve the relief.
Not All Doom & Gloom
There are some positive aspects of the relief that can be overlooked. For example, it is generally accepted that only one home at any one time can qualify for PPR relief but this is not always the case. The following are some of the lesser known positive aspects of the relief:
-The last 12 months of ownership of the property is a period of deemed occupation. Therefore, during this time you could own a second property that will also qualify for the relief.
-By Revenue concession, if you are absent from the property because you are receiving care in a hospital/nursing home or are a resident in a retirement home then you can treat this as a period of occupation of the home provided that the property remains empty or is occupied rent free by a relative.
-If an individual buys a plot of land, builds a house on it and then lives in the house for 20 years as their main residence, most people would assume that the individual has no gain on the house when it is sold. Under the legislation this is not the case as the period of ownership begins when they purchase the land but the period of occupation does not begin until some time later. Therefore, the individual will have a capital gains tax liability on the period from when they bought the land to when they moved into the house.
Again by Revenue concession, if you are building a house to use as your main home, and the building takes less than a year then the period from the date of purchase of the land to physical occupation of the house can be treated as a period of occupation for the purpose of the relief. On the flip side, if the property takes longer than 12 months to build, a maximum of 12 months can be treated as a period of occupation.
The formula used to calculate the taxable gain has the effect of taxing the pre-construction gain on the land only.
-If you provide a property rent free for a dependent relative and this property is their sole residence, then as long as the other conditions for PPR relief are met you can also claim PPR relief on this property. This is irrespective of the level of income the dependent relative has and whether or not you have a home of your own that would qualify for PPR relief. The definition of dependent relative is quite wide and includes an elderly relative and a widowed parent, irrespective of their age. You now have an excuse for your mother-in-law to live in your second property and not with you in your home!
-As you can see, PPR relief is not as straightforward as you may think but in today’s property market it can prove a very valuable relief.
The above gives a flavour of some of the positives and pitfalls with PPR relief. As always it is important to talk to your client and ascertain all the facts (no matter how irrelevant they may seem at first glance) before making any decisions as to whether to tax or not to tax the sale of the property.
8/19/2009 3:55:00 PM
Hello, I have recently sold my house primary residence in France and moved back to Ireland. Am I liable to pay any tax on the sale of this house? thanks
6/5/2009 2:34:00 PM
I am just wondering...if my husbands mother transfered land which has been used for agriclutural in to my husbands name will he have to pay capital gains on the land...We would be girted the land, its over an acre and we have been given a site already which we have built on. This land would be an extension of our primary residence. Thank you
4/17/2009 6:51:00 PM
My former PPR has been rented for the last 3 years. We own it in total for 8 years. How is CGT calculated? Is there an allowance for the fact it was our PPR? Thanks Orla
3/24/2009 12:30:00 AM
Hi, I am a US citizen and resident. In 2001 I married an Irish citizen, who moved to join me in America because that is where my employment required me to be located. She owned a house in Dublin, which she has owned and used as her PPR from roughly 1975 until 2001. Since that time, it has not been her PPR, as she has been both resident and ordinarily resident in the US. Since 2004, the house has been rented out, although it is empty now. We are now trying to sell the house. I know that if the Dublin house had been her PPR from 1975 until now, there would be no capital gains tax due. I have also seen on revenue.ie that there is partial relief for a situation within which a house is rented for a part of the total ownership period. Unfortunately, I cant find a reference for calculation of the degree of partial relief. Can you help out? Best, Brian
9/26/2008 12:14:00 PM
As you moved out of your home more than 12 months ago you may have some CGT to pay on the sale. You are only allowed the last 12 months as deemed to be living in your old house. The cgt liabilitywill depend on the length of time you lived in the houeincluding the last 12 months and the number of months that you did not live in the house. FOr example if you owned and lived in the house for 5 years and it then took 2 years to sell, you would onlyhave to pay CGT on 1/7 of the gain on your house -effectively the extra 12 months it took to sell your house
9/14/2008 2:57:00 PM
hi, my house has taking over the 12 month CGT limit to sell. i had bought a house prior to selling my PPR as i wanted to minimise families disruption. i did not forsee the problems in selling houses when i initially moved. i informed revenue of my new PPR address when i bought the new house. will i have to pay CGT on my sale?i wanted to put all money off my new mortgage. the house wasnt rented or anything. thank you for any help with my question.
12/20/2007 3:10:00 PM
Hi Noreen If the house was the person's main residence at some point, they will be deemed to have lived in the property for the last 12 months of ownership. This is the case whether they left the property vacant or rented the property.
12/11/2007 11:44:00 AM
Hi Is the last 12 months of ownership of a house free of CGT if rented.