I live alone in a house that I own. However, for the past few years I have taken in a lodger to help pay the bills. It is not an issue right now but I am wondering what this will mean if I sell the house in the future.
I do not think they come under the rent-a-room relief as we have agreed to divide the house so that each of us has our own area to live in without intrusion. But it is still my only home.
I am wondering if this is a situation you have come across before and if you can advise what, if any, tax liability I might have if I sell.
Mr BK
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I’m not sure why but this is a situation that has never crossed my desk until now. That’s odd because it is not that unusual a position these days.
People who are alone because of bereavement or relationship break-up can find themselves with a home that is often too big for them and bills that can threaten to overwhelm.
Taking in students or a lodger to help meet those costs – or even for a bit of company – is one obvious answer, quite apart from helping to address our current housing crisis.
The basic rule is that you do not pay capital gains tax on your principal private residence – your only or family home – as long as it sits on a site of less than one acre and you are selling it for occupation and not for its development potential.
But, if it is a rental property, it is liable to capital gains.
The obvious answer here is rent-a-room relief. Despite its name, it does not restrict you to a single room.
[ Is a room rented under rent-a-room scheme restricted by RPZ rules?Opens in new window ]
The key criteria are: that the property is your home and you reside there at the same time as your tenant; that the room or rooms are in or attached to the home; the person is staying for more than 29 days; and that the total income you receive for rent and any associated services (utility bills, laundry etc) comes to no more than €14,000 in a calendar year.
A cent more than €14,000 and you no longer meet the conditions for the relief and the whole lot becomes taxable as income. In capital gains terms, that €14,000 threshold is the limit between principal private residence and rental property.
So, regardless of how you have organised your living arrangements, if the annual rental income is below €14,000, you should be OK for the rent-a-room relief and I cannot see Revenue challenging that.
If the figure is above, all is not lost.
If you sell, Revenue will want to look at two things. First, for what proportion of your ownership did you rent out some of the space? Second, how much of the space did you rent out?
In fairness, this would apply also if you were running a business out of part of the property.
You’ve given me no figures here so I’ll just give you a very basic example and you can adjust it to meet your circumstances.
Say, you own the home for 30 years and you take in a tenant other than under rent-a-room relief for the last 11 of those years. The final year of ownership is regarded as owner-occupied regardless of the actual circumstances, so you will be considered to have rented the property for 10 of the 30 years, or one-third of your period of ownership.
There is a second element. How much of the home did they exclusively occupy, and that “exclusively” is important. If you shared the kitchen or a dining area, a sittingroom and/or a bathroom, they don’t count.
Let’s just assume the house was split 50/50: you lived downstairs and they lived upstairs with their own makeshift kitchen etc.
So, for one-third of your period of ownership, one-half of the property was rented and the balance was occupied by you as owner-occupier.
In those circumstances, Revenue would assess capital gains on one-sixth of the financial gain made on the sale of the property as one half of the home has been rented out for one-third of the period of ownership.
As a formula, that is 10/30 x 50 per cent. You know how much of the home they exclusively occupy and for how long, so you can simply replace those figures with your own. The same basic principle applies if you have more than one tenant.
If the house was bought before the end of 2002 – as it is in our example – you would also be able to apply an indexation factor – available here – to the original purchase price to allow for inflation. You can also takes any costs incurred in buying and selling the house, such as legal and estate agent fees, from any capital gain before assessing tax liability.
Of course, if you hold on to the house until you die, any capital gains tax liability will die with you.
Remember, the first €1,270 of any capital gain arising is exempt from tax. It’s not a huge amount in the context of a house sale but every little counts.
Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or by email to dominic.coyle@irishtimes.com, with a contact phone number. This column is a reader service and is not intended to replace professional advice
