I am a member of an accountants’ network group. We think your advice in a recent column on the treatment of losses on the sale of a section 23 property is incorrect.
The capital loss on disposal of a section 23 type property is reduced by the amount of section 23 relief claimed against rental income. This results in no allowable loss to carry forward or set off against other gains. See Taxes Consolidation Act 1997, section 555 and section 372AP(13/13A). If the relief claimed on a section 23 property exceeds or equals the loss, the loss is effectively reduced to nil.
If the site value was very high it could happen an allowable loss would arise, but not normally. With the passing of time since the boom years of the early 1980s, many people are not familiar with section 23 property tax allowances. I hope this is of some help.
Mr ED
It is indeed of much help, Mr ED. You were one of many people to contact me in the wake of the column two weeks ago where a reader sought guidance on what she could or could not do with losses that had arisen on the sale of a section 23 property at a loss.
She had bought in 2005 at €285,000 and sold in 2020 for €170,000. In the meantime, she had secured the full tax relief available to her on her rental income.
Section 23, for those unfamiliar with the arrangement given the passing of time, allowed people to set rental income received not only from the property concerned but other properties against the cost of the section 23 investment. Only when the relief was exhausted did they start paying income tax on their net rental income. It no longer exists.
As you can imagine, it was a very valuable tax relief when available and the reader acknowledged she had maxed out her relief at €242,000. Not bad.
The confusion arose because she received conflicting advice. One accountant advised her that capital losses on the sale of section 23 properties could not be offset against capital gains either in the year of the sale or carried forward. She had understood she could offset the losses and had registered the loss with Revenue for the purposes of doing so.
I told her that I could see no reason why she could not claim the losses as the sale of the property was distinct from the section 23 relief that she availed of.
I cannot recall ever receiving as much correspondence from practising and retired accountants to an answer in this column down the years. All point, as you do, to section 555 of the Taxes Consolidation Act 1997 (TCA) and to this section 372AP. Most rely not just on their own understanding of the issue but on the view of various tax advisers they have consulted down the years.
That’s a serious weight of professional opinion ranged against my position. The critical issue here is the date on which she sold the property – 2020. And the clue is in the naming of section 372AP.
Even in the last 1990s, the government of the day had started rolling back some of the very generous reliefs available. And in the Finance Act of 2002, it continued this process with 12 new sections amending the rules governing section 23 as laid out in the TCA 1997 – including section 372AP.
[ Don’t leave PRSI benefits on the table – they can save you thousands of euroOpens in new window ]
Legislation is normally listed by a section number. There might be subsection numbers and letters but each section normally just has a number – section 372, for instance.
When you start seeing section 372A, you will suspect it has been amended by subsequent legislation, and when you get to section 372AP, you’d be correct in suspecting myriad amendments likely over many years.
In this case, section 372AP, as you say, sets down that if an investor makes a loss on the sale of the property but that loss is less than the amount of tax relief they got during their ownership of the asset, then it is deemed to wipe out any capital loss, leaving you nothing to claim against other capital gains in the same year or going forward.
Only where the capital loss exceeds the benefit secured under the tax relief will you have a claimable loss – covering only the amount by which it exceeds the relief secured, not the whole loss.
The key is in subsection 13 of section 372AP, later further amended by the 2015 Finance Act, which added the section 13A to which you also refer.
If our original reader had sold her property before the 2002 Finance Act provisions came into force, they could have claimed the loss but any sale after that is covered by the amended rules.
As she sold in 2020, and her loss on the sale (€115,000) is less than the €242,000 she got in tax relief on her rental income, she cannot claim the loss on the property sale against any other capital gains.
As you note, with the passing of time, we are less familiar with the intricacies of section 23 investments as they are no longer available. In this case, the amending section 372AP never crossed my radar.
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
