Key Post CGT implications of keeping your PPR as an investment after trading up

Brendan Burgess

Brendan Burgess

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This has come up in a few threads, and I think it would be worth teasing out separately.

The CGT rules
If you sell your PPR within 12 months of vacating it, there is no CGT.

If you keep it as an investment, the CGT

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If your house is worth less than you paid for it, when it ceases to be your PPR

If you paid €200k and it's now worth only €150k, any increase in value up to €200k is exempt from CGT.

If your house is worth today the same as you paid for it, but it increases in value while it's your investment property

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So this is a tax-efficient investment

If your house is worth more today than what you paid for it, but falls in value before you sell it, you could end up with a CGT liablity

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So, although your house falls in value while it is an investment, you end up with a CGT liability.

If you had sold it when it ceased to be your PPR, you would have avoided any CGT liability.
 

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As I said, bank the CG (depending on the circumstances) and avoid the CGT, and start again. BB how would that work out for a rental, that was always an investment, I like they way you do the tables/charts :), it's always a refresing way to view something differently.
 
Hi Bronte

It seems to depend on how much gains you have made to date and how it increases between now and when you sell it.

Example 1

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Example 2

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The problem is that one can’t predict the future. I’m struggling to see circumstances where one would be better off moving from an investment property that was previously one’s PPR to a property that wasn’t (ignoring quality/location/etc).
 
Bronte said:
As I said, bank the CG (depending on the circumstances) and avoid the CGT, and start again.
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Actually, I think that makes a lot of sense.

I traded up in 2005, retaining my then PPR as a rental, which had roughly doubled in value from when it was first acquired. Over the next thirteen years, the value of the property roughly halved and then came back to roughly the value when it was first let out in 2005.

So I ended up with a substantial CGT bill when I sold the property, even though its value went nowhere over the thirteen years held as a rental.

With the benefit of hindsight, I would have been far better off banking the capital gain in 2005 and using the proceeds to buy a different rental property.

A (CGT free) bird in the hand....
 
Brendan Burgess said:
Hi Bronte

It seems to depend on how much gains you have made to date and how it increases between now and when you sell it.

Example 1

View attachment 4536
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If it's your PPR then there would be fully PPR relief under Keep the Property. PPR relief from 200K to 400K is total. No CGT.
But
If you sell at 300K, no tax, then it becomes a rental for 11 years, you have a gain of 100K. Are you worse of if you keep it as a PPR, turn it into a rental Today and sell in 11 years.
And I'm not sure it's a straight 100K PPR relief, it's more complicated than that.
 
Sarenco said:
Actually, I think that makes a lot of sense.

I traded up in 2005, retaining my then PPR as a rental, which had roughly doubled in value from when it was first acquired. Over the next thirteen years, the value of the property roughly halved and then came back to roughly the value when it was first let out in 2005.

So I ended up with a substantial CGT bill when I sold the property, even though its value went nowhere over the thirteen years held as a rental.

With the benefit of hindsight, I would have been far better off banking the capital gain in 2005 and using the proceeds to buy a different rental property.

A (CGT free) bird in the hand....
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I'm a bit tired today. Corona fatigue. That is what I was trying to say in my last post to Burgess. I'd like him to do it in tabular format. It's a long time since I calculated CGT and I think the current rate is pretty hefty.

I have a rental, a couple of years my PPR, it went up, down, up, down etc. So I see where you are coming from. (luckily I have indexation, and capital enhancement). Do you want to give us rough figures to work on. I prefer a real example.

Also CGT was high, reduced, and went back up. So there's all that at play too.
 
Gordon Gekko said:
The problem is that one can’t predict the future. I’m struggling to see circumstances where one would be better off moving from an investment property that was previously one’s PPR to a property that wasn’t (ignoring quality/location/etc).
Click to expand...

It depends on both how long you've held the property and what it is worth compared to sale price today - both of which are correlated.

There is probably a sweet spot of 2006-2009 era apartment purchases which are still 30%-ish off the purchase price where you have the benefit of considerable shelter from any gain.

For any 2013 purchase I think you'd be better off starting again as there is already probably a =~50% gain already and if you sell now as PPR there is no CGT. If you hold on to this as a rental the accumulated liability on sale begins to mount pretty quick.
 
Brendan Burgess said:
But why did you retain it?
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I was young and foolish!

The rental produced a modest profit most years and the mortgage rate on my PPR was fairly low and benefitted from MIR. So, it (just about) made sense as an investment at the time. When it stopped making sense, I exited the business.
Brendan Burgess said:
I think that they were very unusual circumstances such a huge increase followed by a decrease.
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It was pretty commonplace to trade up while retaining an original PPR as a rental back in the mid-2000s so I suspect a lot of folks have experienced this particular roller-coaster.
 
Bronte said:
luckily I have indexation
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I did too and it made a significant difference to the final tax bill.

The fact that indexation relief is gone is a further reason for realising any (CGT-free) capital gain rather than retaining a PPR as a rental.
 
Sarenco said:
It was pretty commonplace to trade up while retaining an original PPR as a rental back in the mid-2000s
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Maybe I put that wrong.

A lot of people did what you did.

But the environment of a big rise followed by a big fall is unusual. (I can't read Coyote's graph but I doubt it's saying anything else)

So the question is where are we now for someone facing that decision now?

First, they will have had to have a big rise from the date of purchase to date.

And then the big fall would have to repeat itself.

Brendan
 
Brendan Burgess said:
So the question is where are we now for someone facing that decision now?
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Well, my takeaway from this discussion is that it probably makes sense to realise a capital gain on a PPR rather than converting it to a rental, particularly in the absence of indexation relief.

But I think this is very much of secondary importance in determining whether or not to retain a PPR as a rental. The projected profitability of the venture from an income perspective is far more important IMO.
 
Brendan Burgess said:
But why did you retain it?

Because you expected property prices to rise.

I think that they were very unusual circumstances such a huge increase followed by a decrease.

Brendan
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Same thing happened to me, the rise during the Celtic Tiger was stratospheric, and the drop catestrophic. Such is property. There were other things that happened too at different times. Especially government interference. I remember Bacon caused no end of problems in the market, and that was so bad the government rowed back on it very quickly, three years I think it was.
 
Sarenco said:
I did too and it made a significant difference to the final tax bill.

The fact that indexation relief is gone is a further reason for realising any (CGT-free) capital gain rather than retaining a PPR as a rental.
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In the middle of it I bought renovated, rented and sold. As it was so quick I remember indexation made a big difference, especially since I sold so high. I kept the PPR for other tax residency issues abroad and also it's my husband's home town so I didn't want him to feel I was cutting him off from that. Now he's been at me for ages to sell it. LOL. But it made a big difference to his tax situation that we could show we owned the family home in Ireland.
Edit: Bought 98, very major renovations, sold in 02, CGT 20%. Very lucky to get out before it went mad altogether. The builder who bought it went bust. He's quite well known.
 
Brendan Burgess said:
Maybe I put that wrong.

A lot of people did what you did.

But the environment of a big rise followed by a big fall is unusual. (I can't read Coyote's graph but I doubt it's saying anything else)

So the question is where are we now for someone facing that decision now?

First, they will have had to have a big rise from the date of purchase to date.

And then the big fall would have to repeat itself.

Brendan
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Another thing about the past not to forget
- interest rates were very high back then
- government consnatly interferring
- CGT going up, down and up again
 
Brendan Burgess said:
But the environment of a big rise followed by a big fall is unusual. (I can't read Coyote's graph but I doubt it's saying anything else)
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Not really, the average annual change (either positive or negative) in Irish house prices is 11% since 2005. Irish prices are very volatile compared to most places.

Ultimately this is an empirical question. I'll do up a table later in the day which sets out the parameters.
 
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