Selling and buying again before 31 December for CGT purposes

[Brendan Burgess]

Let's say I own an apartment worth €200k which I have let out.

I should identify an owner of another apartment in the complex and "swap" it with them before 31 December.

If I keep it for 7 years, any gain will be tax free.

The stamp duty is only 1%, so the legal and other costs will be only around €5k per person in total.

If I paid more than €200k for the property originally, I could realise a useful CGT loss.

It would not be worth doing if I have a cheap tracker on the property, but it would be particularly easy to do for people owning mortgage-free investment properties.

 

[T McGibney]

Why would you want to do that Brendan?

It would clearly fall foul of general anti-avoidance legislation on the basis that it would be an arrangement motivated to generate an artificial tax advantage, which Revenue could quite easily have nullified.

 

[Brendan Burgess]

Hi Tommy

Thanks. I was wondering why I hadn't seen it discussed anywhere.

I thought it was just good tax planning. But if it could be rejected as artificial, then it would not be good tax planning.

Brendan

 

[mandelbrot]

I'm sure I started a thread on a similar vein not too long ago.

Basically suggesting that before the end of this year would be a great time for investors with a portfolio of property to rearrange their portfolios if they wanted - not purely because of the tax benefit, but because the tax benefit would greatly increase the upside.

If you have some property(ies) that are carrying gains, and other(s) currently at a loss, you could dispose of a couple, match gains to losses and pay no CGT. You could then reinvest in what you might now perceive to be better value properties, knowing that you'll also have the benefit of a 7-year CGT holiday that your present portfolio will not enjoy... am I missing something or was this in itself (even without any artificiality) not a great opportunity for property investors??

 

[Brendan Burgess]

I'm sure I started a thread on a similar vein not too long ago.

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There is no sign of a thread started by you on the topic. You may have replied to someone else's thread.

If you have some property(ies) that are carrying gains, and other(s) currently at a loss, you could dispose of a couple, match gains to losses and pay no CGT. You could then reinvest in what you might now perceive to be better value properties, knowing that you'll also have the benefit of a 7-year CGT holiday that your present portfolio will not enjoy... am I missing something or was this in itself (even without any artificiality) not a great opportunity for property investors??

So if I sell an apartment to someone from whom I buy a similar apartment, it would be purely artificial.

But if I sell a Pre-63 in 6 units and reinvest in a modern apartment, that would be good portfolio management?

 

[Bronte]

So if I sell an apartment to someone from whom I buy a similar apartment, it would be purely artificial.

But if I sell a Pre-63 in 6 units and reinvest in a modern apartment, that would be good portfolio management?

I don't get why it makes any difference whether you buy a similar apartment or not. Why is that more artifical than the second scenario.

Any chance of a worked example on the 200K apartment. You're going to sell that and make a loss, and buy a new apartment, for 200K presumably, and in 10 years, if property were to go up, any gains would be tax free. You also win in that the 'loss' on the original 200K aparment can be offset later against any gains on other properties, which is important as CGT is very high currently.

The full costs you reckon are about 5K. Legal costs of buying and selling, auctioneer for selling, and stamp duty for purchase.

(I expect the Noonan to continue the CGT gains exemption next year as he'll be itching to interfere with the property market).

 

[Brendan Burgess]

I don't get why it makes any difference whether you buy a similar apartment or not. Why is that more artifical than the second scenario - selling a pre 63 and buying an apartment

Hi Bronte.

I could take a view on the property market that owning a Pre-63 house worth €400k is too much work e.g. new building regulations etc, so I should sell it for €400k and buy two apartments in a modern block. I might consider that apartments will rise more than pre-63 houses. This is a perfectly valid commercial process to revamp my portfolio. And by the way, there is a big tax advantage.

If I sell no 8 Dax House which is earning me rent of €1,000 a month and buy no 7 Dax House which will earn me €1,000 per month, it would be hard to justify other than for artificial tax reasons - especially if no money changed hands as the owner of No 7 buys no 8 from me on the same day.

 

[Brendan Burgess]

Any chance of a worked example on the 200K apartment.

Assume 5k in transaction costs.
Assume purchased in 2007 for €400k
Assume sold in 2020 for €400k (This is not a forecast - it is just for the calculation)

There will be no CGT on either case in 2020.

So what is the difference today?

Loss for CGT purposes: €200k @35% = €70k
Less costs incurred: 5k
Net benefit: €65k

You also win in that the 'loss' on the original 200K apartment can be offset later against any gains on other properties

It's much better than this. It's not just properties. And it's not just later.

If you have unrealised gains on shares or any other assets of €200k, you can sell them now and set the loss against the gain immediately.

Again, allow arround 2k in costs for selling the shares and reinvesting the money in other shares.

What if you sell for more or less than €400k after 7 years?
I don't think it matters.

If you sell for less than €400k, you won't be paying CGT in either situation.

If you sell for more than €400k, you will pay CGT on the difference between €400k and the sale price.

 

[Bronte]

I think you need the advice of an accountant.

I'm going to have to think about this myself. My sibling told me I should sell a property as the return is not good enough and buy something that will do better, so the CGT angle might come into it. It's could be an incentive for reasons I'm not allowed discuss on here.

 

[Brendan Burgess]

I My sibling told me I should sell a property as the return is not good enough and buy something that will do better,

There are two separate financial decisions you have to make here. If you own a residential investment property which is not earning you a good return, maybe you should sell it.

The primary assessment should be the "business" case and then work out the tax implications.

Having made the decision to sell, you then have to make a separate decision as to whether you wish to invest in property again. If you do choose to invest in property, do so before the end of the year to take advantage of the CGT exemption.

It's could be an incentive for reasons I'm not allowed discuss on here.

The ban on house price speculation does not bar you from working out the implications in the context of this thread, as I have done here

I might consider that apartments will rise more than pre-63 houses.

 

[Mrs Vimes]

The loss should be increased by the costs of disposal too, so it's 205k@35%, no?

Doesn't make much difference to the calculations.

Correct, but it's a quick example to illustrate the principles.

 

[amadain]

WHAT IF, one identifies an owner of another apartment in a completely different complex (even in a different town) and "swaps" it with them.

This situation would NOT clearly fall foul of general anti-avoidance legislation -
on the basis that it would be an arrangement motivated to generate an artificial tax advantage -
and therefore Revenue could NOT easily have it nullified.

 

[mandelbrot]

WHAT IF, one identifies an owner of another apartment in a completely different complex (even in a different town) and "swaps" it with them.

This situation would NOT clearly fall foul of general anti-avoidance legislation -
on the basis that it would be an arrangement motivated to generate an artificial tax advantage -
and therefore Revenue could NOT easily have it nullified.

Why is "swaps" in quotation marks?

 

[Setanta12]

I think GAAR legislation - and tax artificiality - is difficult to prove especially where there are other commercial reasons why a transaction is considered. (Hence why you might see an over-emphasis on the non-tax implications of certain moves on tranactions in internal memos etc. )

 

[T McGibney]

I think GAAR legislation - and tax artificiality - is difficult to prove especially where there are other commercial reasons why a transaction is considered. (Hence why you might see an over-emphasis on the non-tax implications of certain moves on tranactions in internal memos etc. )

My understanding of general anti-avoidance rules is that the burden of proof lies with the taxpayer to demonstrate that a transaction is not artificial.

 

[amadain]

Why is "swaps" in quotation marks?

Sorry mandelbrot, by 'swaps' I meant..............

.....WHAT IF, one identifies an owner of another rental property and both parties sell their property to the other party for the same price.

 

[amadain]

As announced in the recent budget, the incentive relief from CGT in respect of the first 7 years of ownership for properties purchased between 7 December 2011 and 31 December 2014 is not being extended beyond 31 December 2014.

Creating an false boost in sales ?