Mortgage shortfall

Hi there,

my sister is getting married this year and so will not be living in the family home anymore that we both own after inheriting it. She wants to sell it to me as otherwise she is liable for tax on it as it would not be her home when she moves in with her fiance.

I own half and could raise a bit through a small mortgage and savings but will be about 50K short.

If anybody has been through a similar situation or has any advice I would be grateful to hear them.

You could buy her half of the house now for say €100k, and pay her €50k , but owe her €50k.

Does she need the money?

Are you sure she has a CGT liability if she does not sell it?

What was its value when you inherited it?
What is its value today?

How long did she own it as her ppr? The gain is spread over the entire period of ownership, so her CGT liability might be very small if she holds onto it.

thanks for getting back to me brendan, the house is the same value more or less as when we inherited it, possibly up 25K more now. I don't think she needs the money urgently but understandably would like it all wrapped up if possible.

In regards to cgt I think she is liable for it if she sells it after marriage as she will be filing a joint tax return with her husband and obviously will not be able to claim that they live in separate dwellings and he already has a place.

She owned it as her ppr for 4 years or so. I don't really understand about how the gain over the period of ownership works but I think she would want to sell it now to give her more options in regards to possibly moving once they are married.

I would like to do it the way you suggest and owe her the 50K but not sure how that would work in terms of ownership and also down the line would I have to get a second mortgage or refinance it to pay her the balance to allow her to buy a place with her husband.

It sounds as if you cannot afford to buy her out. And she does not want to gift you or lend you any portion of the actual value.

A lot of people are irrationally attached to property when the reality is they cannot afford to live in a property unless someone else subsidises them.

What is your view on selling the entire property? And you each take your share?

mf

fair point mf,

I'm not emotionally attached to the property and may indeed have to sell it but realistically if I can hold on to it now and rent out a room or two while I live there will allow me to afford it.

She is getting married this year so I don't know if I will be able to get as much as if we were selling at our own pace.

Any ideas on where I can find out more about the lending a portion of actual value option?

I don't think that joint assessment with her husband makes any difference.

Say it was worth €200k when you inherited, it i.e. €100k each.

Let's say she sells you her share for €200k in 4 year's time.

The CGT calculation is as follows - roughly speaking.

Capital Gain over 8 years of ownership €100k
Less PPR relief as she lived in it for 4 years €50k
Gain subject to CGT €50k
Less annual exemption - ignore
CGT at 33% €16,500

And she only pays CGT if it goes up in value.

So from a tax point of view, she need be in no hurry to sell it.

I could be wrong, but if the house is the same value more or less than when you inherited the house, then your sister wouldn't be liable for any tax on the property now anyway as there would be no capital gain to be taxed on.

thanks for that brendan, is that 33% of €16,500, or 33% of 50K, looks like the former. I think though that she would rather be rid of it, and that if she waited 4 years it would be 4 years without the bulk of the capital from the property (preventing her from buying a house with her OH). I am just trying to find a way to release the majority of the equity from the property to leave her in the best position.

If it is worth 200K and I can afford 50K leaving 50K outstanding to her, is the only way that I can buy it outright from her is by getting essentially a legal iou or equivalent? At least this way she would have the 50K instead of waiting years to see the full amount.

True sprocket but whatever it went up, say 25K now or whatever later she would lose a large propotion in tax as it was not her ppr.

Slight correction to Brendan's calculation - if the house was your (her) ppr at any stage then the last 12 months of ownership are also exempted from CGT.

CGT is calculated based only on sale price and purchase price so if the sister moved out and sold in 5 years and it had gone up by 100k entirely after she left having been worth the same the day she left as the day she inherited she would still be entitled to ppr relief as if it had increased equally over the entire period of ownership.

None of which solves her cashflow!

Thanks anyway Mrs Vimes,
I looked it up on the revenue.ie website and unless I am misinterpreting it this means that if she moves out in Nov 14 and it is sold in Oct 15 she would not be liable for any cgt?

"Gains made on the disposal of your home together with its gardens or grounds up to an area (exclusive of the site of the residence) of one acre may be exempt. For full relief to apply, you must have occupied the home as your principal private residence throughout your period of ownership or to within 12 months of the date of disposal."

Sorry for looking for clarification but I find the section a little hard to follow.

Acheron3 said:

I'm not emotionally attached to the property and may indeed have to sell it but realistically if I can hold on to it now and rent out a room or two while I live there will allow me to afford it.

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Don't see why you are holding on to it? Wouldn't that be the cleanest thing all told?

What do you mean rent out a room to afford it, afford what?

Do you have any problems living with a stranger?

Acheron, you are correct in your reading of the last 12 months ppr exemption

Hey Bronte, the reason I would like to hold onto it is because I know the property in terms of its flaws and advantages. Secondly I expect it to increase in value over time. Because of its location I would have no problem finding housemates or tenants if I decided to rent out the whole place. If I were to buy another place it would not have a lot of these advantages, as well as incurring expenses in the sale of one property and the purchase of another. It really is a financial decision not an emotional one.

Rent out a room to pay back my sister over time the balance of what is not covered by the mortgage I can presently afford.

Thanks Mrs Vimes, I thought that is what it meant but wanted to make sure I was reading what I wanted to into it. I had heard differently so it is good to get anothers' take on it.

The bottom line here is that despite the discussion on CGT liability, your sister wants to liquidate her portion of this asset within a short time frame. In order to satisfy her requirement you need to raise sufficient funds to buy her out. Per your own calculations you will be 50K short (including mortgage raised on the property). I take it from your post that the maximum mortgage you will be given will still leave you 50K short. Unfortunately, unless your sister is agreeable to postponing receipt of her share of the funds, you have no alternative but to sell the property on the open market if you have no other recourse to raise this 50K.

thanks Brendan, I was hoping someone who had been in a similar situation would have been able to use the asset as a secured loan, obviously with the bank who gives me a mortgage getting first recourse in the event of a sale.

Acheron, it is of course feasible to raise a loan from 2 parties on the same property. However, no bank will issue a loan on foot of a 2nd charge in the current climate. The key issue for you is that if you don't fulfill mortgage criteria for the full amount of the loan you require, you would be considered as a poor credit risk to lend this money to. Other than a mortgage any other loan would be for short term only. You are obviously not in a position to pay back a 50K loan over a relatively short period plus a "small mortgage".
I appreciate that you want to hold on to this property, but you need to be realistic and accept that if your sister needs her share of the property, a 3rd party sale is the only way to achieve this!

I figured there would be issues alright Brendan, I'm very new to this so couldn't understand why there would be an issue in regards to a loan of 50K secured against 100K in the example above. It makes sense if banks wouldn't want to risk it in the current climate. She would need her share of the money to buy her own place so it wouldn't be cash that she essentially needs but a commitment to repay secured against an asset.

But like you said it seems unlikely that an institution would go down this route.

So based on your OP yours solution currently is to raise a small mortage and use your savings. And then agree with your sister that you pay her the remaining 50K over time. If I were your sister, she should get this in writing via a solicitor, with you paying that bill. And make sure all taxes are up to date.

that exactly what I was hoping for Bronte. The issue would be the paying her over time bit as she would like to move into their own place next year so if her mortgage provider wouldn't take a secured loan as acceptable she would be back to square one.

Also she's already looked into the legislation and it may not be as straight forward as it seems because of the marriage issue. If she was filing her return as a single person then the years grace would apply, but in this case it is a grey area.

Your sister is not in any grey area - the CGT exemption for ppr extends to 12 months after the property stops being your ppr.

Opting for joint assessment with her spouse also has no bearing on this. A married couple/civil partners can have only one ppr between them, that is the only relevant aspect to her being married. If she was not married and moving in with the boyfriend it would equally cease to be her ppr, although it may be easier to claim it wasn't (easier, but still fraudulent).