CGT Position - Old PPR is now Investment Property?

M

MelF

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Hi there,

Posted my first question here yesterday and got such fantastic help that I'm doing it again!

My position is thus, having lived in my first house for seven years, last year I bought another house and decided to keep my old one and rent it out. It is now an investment property and mortgage has been changed to commercial etc. I bought it (first property) in 1999 and benefited from the rises in the market which means it is now worth nearly 500k more than I paid for it. On the other hand, what with current market conditions my new property probably hasn't gained in value at all.

My question is, if I were to sell on my old PPR, will I be liable for CGT on the full amount of this large gain in value? And if so,is there any way to avoid as much of this as I can legitimately, ie should I mortgage as far up to as the property's current value that I can to reduce the profits on an eventual sale? Current mortgage is 270k and recent valuation put the property at 770k.

I'm just wondering if I'm an eejit for moving at all now.....

Thanks in advance
 
Firstly, mortgage costs won't factor into your CGT computation (though mortgage interest does impact your rental income).

If you sell a property within one year of it ceasing to be your principal private property, you still get full relief on the gain (ie no tax payable). If you are outside that window, then some of the gain is taxable.

The way PPR relief works is to give a time apportioned relief for the period in which it was your PPR plus the last 12 months.

So, presuming you put the property on the market now, it takes a while for the sale to close so the sale happens 2 years after you moved out and the gain remains at 500k, then your PPR relief would be calculated as:

500k x 7 years + 1 year/9 years (total ownership period) = 444,444

This means that just 55,555 of the gain is subject to tax and so the tax payable on your gain of 500k is just €11,111.

Obviously, the longer you own it (without it being your PPR) the more of the gain that is taxed.
 
So mortgage costs DONT factor into the gain then? It's purely the difference between buying price and selling price? I assumed it was the profit you walked away with that was subject to CGT ...

I moved last September so not gone a year yet, but haven't stated anywhere officially which house is my PPR. Heard somewhere that you have to inform the Revenue if you change PPR and you have two years to do so - is this correct? Or have I essentially declared which one is my PPR by renting out the old one? Although rental gains will only be declared in my 2007 returns next year?

Sorry for all the questions, trying to get my head around this and wondering if I should just offload the old PPR altogether. Still a tax bill of under 12k isn't too hard to take.....

Thanks a million
 
MelF said:
So mortgage costs DONT factor into the gain then? It's purely the difference between buying price and selling price? I assumed it was the profit you walked away with that was subject to CGT ...
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exactly. Your gain on the disposal of property is the selling price, less related costs, less purchase price and related costs (including stamp duty). Interest costs are only allowed in very strict circumstances and only for companies.
Or have I essentially declared which one is my PPR by renting out the old one? Although rental gains will only be declared in my 2007 returns next year?
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as you've let out your former home, it cannot be your PPR anymore. The issue of informing the Revenue only really arises where someone has two properties available to them - say an apartment in Dublin which they stay in during the week and a house in the country somewhere that they go to every weekend.
 
OK, so just to clarify - if I were to keep and rent out the old PPR for another 7 years, does this essentially negate the 7 years I lived in it? Is that how it works?

Tying myself up in knots here....
 
MelF said:
OK, so just to clarify - if I were to keep and rent out the old PPR for another 7 years, does this essentially negate the 7 years I lived in it? Is that how it works?

Tying myself up in knots here....
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The amount of the gain taxed, is the proportion of the gain that relates to the ppr period of ownership.

So, if you lived in it for seven years and owned it for 14 years then

8/14 of the gain would be exempt or 6/14 would be taxed. If the gain was still 500k that would give a taxable gain of 214k or tax of 42k.
 
No - if you owned the property for 14 years, 7 years as your home and 7 rented out then c. (7-1)/14 = 43% of any resale gain would be assessable for CGT. The longer you keep it rented out the bigger the percentage of any gain that will be assessable for CGT. You cannot magically reduce your CGT liabilities. You can deduct allowable expenses, your annual CGT allowance of €1,270, offset any previously incurred capital losses and index the acquisition price for inflation up to c. 2003. If you still don't get the gist of this stuff - and even if you think that you do - then you most likely need professional advice.

Post crossed with Nige's.
 
Bottom line, before you are sell the property, it is essential that you get proper professional advice on the tax implications. If you are not intending to sell in the foreseeable future, the above posts should give you a rough idea of what's involved.
 
Ok thanks a mill, appreciate all the insight. Would prefer not to sell at the moment as the property gives a really good yield.

Another question then, does it make sense to mortgage it higher to avail of the mortgage interest relief and thus reduce rental income liability? Say release another 100k in equity to allow me to reinvest further. (or perhaps pay off more of the new PPR mortgage?)

Thanks again
 
Mortgage interest can only be offset against rental income to the extent that that mortgage was used for the rental property. You would therefore get no additional tax deduction if you used the 100k to reinvest elsewhere.

However, it may be beneficial for you to change the mortgage to interest only.
 
The mortgage is currently interest-only, am talking about upping the mortgage by 100k which means paying higher mortgage interest and offsetting this to the rental income - hoping essentially the relief will cover most of my rental income liabilities. Not sure if there is a limit on the mortgage interest allowable for investment properties in the way there is with PPRs?

Then the 100k 'released equity' is free to reinvest elsewhere. Does that make sense?
 
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MelF said:
The mortgage is currently interest-only, am talking about upping the mortgage by 100k which means paying higher mortgage interest and offsetting this to the rental income - hoping essentially the relief will cover most of my rental income liabilities.

Then the 100k 'released equity' is free to reinvest elsewhere. Does that make sense?
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You CANNOT offset the additional interest on the equity release against your rental income.
 
So then there is a ceiling on how much mortgage interest is allowable? Or is it that the 100k need to be used to renovate or improve the property it's borrowed against?
 
Thanks, that clears it all up considerably. Appreciate the advice, thanks!
 
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