How to minimize taxes on real estate sales

In many cases, there is no obvious successor, so more farms enter the market, whether by the current owners or those they inherit.

The decision to sell can often be determined by the amount of tax that the sale proceeds will entail.

In many cases, there is little or no tax on disposals of smaller holdings, but there can be significant capital gains tax (CGT) liabilities on larger holdings. Avoiding or minimizing taxes can be due to the availability of two facilities:​

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Entrepreneur relief

This is available to landowners who are selling land they have owned and farmed for at least three of the five years prior to the sale.

A CGT rate of 10 percent applies to the first €1 million of profit from the sale.

The tax rate on the excess profit above €1 million is subject to the standard rate of 33 percent.

The relief does not apply to individual properties owned by a company.

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old-age relief​

This is available to persons over the age of 55 in relation to land owned and farmed for an uninterrupted period of 10 years.

If the properties have been leased since December 31, 2016, these properties must have been leased for at least five years without interruption.

In addition, the land must not have been leased and/or rented for more than 25 years unless the landowner was a participant in the Early Farm Retirement Scheme.

The benefit of the relief is that for eligible individuals over the age of 55 but under the age of 66, the first €750,000 of sales proceeds are tax-free.

For people aged 66 and over, the first €500,000 in proceeds are tax-free.

Unfortunately, all proceeds exceeding these respective limits are subject to a 50 percent tax to the point where taxing the profit in the normal way at 33 percent is more advantageous (see Case Study 1).

Also, all disposals are cumulative. So if the first sale does not exceed the €750,000/€500,000 limit but a subsequent sale occurs, the exemption for the first may be lost in whole or in part.

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Replace one relief with the other

Because the retirement deduction is based on gross sales proceeds and not profit, and Entrepreneur Relief is a tax on profit, it may be possible in certain circumstances for a subsequent disposal to have both deductions applied.

For example, a property owner can make a sale and claim a retirement benefit, which does not result in any liability. He later makes another ruling, so that the two rulings are now added together to calculate the relief.

It may be more beneficial to claim Entrepreneur Relief on the combined profit now rather than claim Retirement Relief on the combined proceeds. Case study 2 describes such a scenario.

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case study 1

Joe is 60 and is selling land for €900,000. He meets all the requirements for both the entrepreneurial relief and the old-age relief.

Assuming a base cost of €400,000, which includes allowable deductions and his personal exemption, we will consider Joe’s CGT liability under three headings:

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■ Normal CGT treatment with no relief

In the absence of relief, the taxable profit is €500,000, resulting in a liability (at 33 percent) of €165,000.

■ entitlement to retirement benefits

Because Joe is over 55 and under 66, he can claim a pension benefit of €750,000 of gross earnings and a marginal 50 percent benefit on the remainder. This creates a liability of €75,000, so he saves €90,000.

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■ Application for business relief

Joe’s net profit is €500,000; At less than €1 million, it qualifies for the 10 percent rate, which equates to a liability of €50,000 – a savings of €40,000 over retirement savings.

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Diploma

Claiming Entrepreneur Relief in this case grants a saving of €115,000 compared to a situation where no relief is available.

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case study 2

John is 65 years old. He sold property for €550,000 five years ago and qualified for age-free allowances, which resulted in no tax liability as he was exempt from the first €750,000 of proceeds at the time.

Now, before his 66th birthday, he is considering another property sale for which he expects 250,000 euros.

Assuming a base cost of €300,000 of the combined holdings, including allowable deductions and his personal indemnity, we will consider John’s CGT liability under three headings:

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■ Normal CGT treatment with no relief

In the absence of relief, the taxable gain from the two disposals is €500,000. At a tax rate of 33%, this results in a liability of €165,000.

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■ entitlement to retirement benefits

Because the combined sales proceeds ($800,000) exceed $750,000, John is taxable at 50 percent of the excess. The deductible is €50,000, resulting in a liability of €25,000.

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■ Application for business relief

John’s total taxable profit is €500,000, so his liability at 10% is €50,000.

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Diploma

In this case, claiming the retirement deduction gives a saving of €115,000 compared to a situation where no deduction is available.

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Summary conclusion

Before you consider selling land, or authorize your will to sell land after your death, have your circumstances carefully and truthfully evaluated before making any decision.

Determine the likely tax consequences of your proposed actions and see if there is a better way, whether for yourself or your beneficiaries.

There are numerous legitimate ways to minimize taxes, and planning ahead is generally key.

Benjamin Franklin’s statement that death and taxes will always be with us comes to mind, and while the death part is largely out of our hands, the tax part can certainly be worked on.