CGT question on sale of a foreign property.

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kautostar1

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A friend of mine bought a new build apartment in Germany for €70,000 in 2007. He sold it this year (furnished) for €160,000. He is thinking of putting in a figure of €20,000 as expenses for the furnishing and for improvements that were carried out over the years. He doesn't have receipts. He is wondering is he likely to be penalized in the event that Revenue question him?
 
That will be a question in the first instance for the German Revenue authorities.

A similar question regarding the cost of furnishings was posed and answered here within the past week or so.
 
But he lives and works here and was born here. He bought it as an investment and paid tax on the rental income here. I should have mentioned that already.
 
kautostar1 said:
But he lives and works here and was born here. He bought it as an investment and paid tax on the rental income here. I should have mentioned that already.
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It will still be a question in the first instance for the German Revenue authorities. Location of the asset is the key determinant.
 
I think the OP's friend may face a couple of issues.

First, under the Ireland-Germany Double Taxation Agreement, rental income derived by an Irish resident from a property in Germany is taxable in Germany (and vice versa). So the friend may have an accumulated liability to German tax on the rent he has received in the past. But the DTA doesn't say that the income is taxable only in Germany and, under general rules of Irish tax law, it will be taxable in Ireland also, but with a full credit for any tax paid in Germany. So, when the friend has sorted out his German tax liablity in relation to rent received in years past, he may need to seek review of his Irish tax assessments for the years in question so as to claim the credits.

Secondly, as T McGibney has pointed out, the DTA also provides that capital gains accruing to an Irish resident on the disposal of property in Germany are taxable in Germany. Again, I think they will also be taxable in Ireland, but with a full credit for the German tax paid.

To the extent the capital gain is taxable in Ireland, I think the answer to the question raised in the OP is: the cost of furnishing the apartment is not capital in nature and so is not deductible in computing the capital gain.
 
Also claiming expenditure with any documented proof of payment is likely to pose a problem with both Gernan and Irish tax authorities

Another point is that you do not automatically get tax credit in Ireland for the full amount of the tax paid jn Germany - it can be less than 100%
 
jpd said:
Also claiming expenditure with any documented proof of payment is likely to pose a problem with both Gernan and Irish tax authorities
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Without, you presumably mean?

In the context of Irish taxation (I cannot remotely vouch for how the Germans handle things like this) I wouldn't necessarily take that as gospel, although undoubtedly the more recieipts or other proof of payment evidence you can muster, the better.

In the absence of actual proof of payment, other circumstantial evidence such as an engineer or architect's statement confirming eg that extension or other structural enhancement works were undertaken may well suffice for evidential purposes.
 
kautostar1 said:
Ok thanks folks. But I’m not sure is he going paying any tax in Germany.
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Presumably he hasn't been, up to now. And this may have flown under the radar, so to speak, because he hasn't lodged any tax return in Germany inj relation to his rental income, because he didn't realise he was supposed to.

But now comes the point where this strategy may come unstuck. The German tax authorities may not know about rental agreements affecting a property unless and until someone tells them, but they do know about the sale of a property. Notifying the public authorities about a land transfer isn't optional; the only way you can transfer land is by registering the transfer. In Germany there's a property transfer tax (varies from 3.5% to 6.5% depending on what state you're in) so when the buyer of the property lodges the transfer with the land registration authority, the LRA tells the revenue authority so that the land transfer tax can be assessed and demanded. I don't know that the revenue authority uses the notification also to check on potential CGT liablities but, given the German reputation for bureaucratic thoroughness, I think it's more likely than not that they do.

If there is going to be a CGT liablity in Germany, the OP's friend wants to know that sooner rather than later, partly to avoid interest and/or penalties, but also because any CGT payable in Germany is deductible from his Irish CGT bill — but only if it has actually been paid. So they want to sort this out before the time comes to settle the Irish CGT liability.

If I were the OP's friend I'd take some advice locally in Germany about how to recognise and settle his German tax liablities before proceeding to sell the property. There may be things he can do to minimise the problem and, if so, he wants to know about them while he can still do them.
 
Ok Tom, thanks for the advice. I’ll show him this thread. But the property is already sold and the money is in his account.
 
I don't think there's any CGT on property in Germany once it's been held for >10 years.

It's hard to see how there wouldn't / shouldn't have been German income tax paid though, and the sale of the property could trigger attention on that... your friend might want to hold onto some of that 160k for a few years in case they get a letter from the Fatherland.

And if he does end up having to pay back tax in Germany, he'll only be able to fix his Irish tax position (i.e get double taxation relief and claim an Irish tax refund to cover his German tax bill on the last 4 years...
 
In order to deduct the cost of furnishings against the proceeds from sale, your friend ought to have ensured that his solicitor included a value for the furnishings in the contract for sale. If not, then it's not clear that the furnishings passed as part of the sale, and are not just being left behind as a matter of convenience. That said, if the costs incurred represent enhancement expenditure on the property then they may be deductible (and it's not clear that they do, but tiling bathrooms and fitting flooring might, theoretically), and as you said, he has no receipts - but sometimes a case can be made based on payments evident from bank statements.

The other posters appear to have ignored the possibility that your friend is not Irish domiciled. Apparently over 20% of current Irish residents were born abroad, which means it's likely they are not Irish domiciled. A non-domiciled individual is liable to Irish CGT on the remittance basis of taxation. This means that the non-domiciled individual is liable to Irish CGT on gains from the disposal of Irish assets and on gains from the disposal of foreign assets to the extent that the gains are remitted to Ireland.
 

The OP has stated that this is an Irish-born individual, who works and lives here...
 
torblednam said:
The OP has stated that this is an Irish-born individual, who works and lives here...
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Sorry I see that now. There goes that possibility.

I don't like the non-dom rules. I would be in favour of removal of these non-dom advantages to Irish residents.
 
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