Last week, apart from getting battered by storms, we wrote about our new website. In case you missed it see here. This week we are going to look at a query that came into us from a client that was going to sell some development land. We will look at
- What is development land?
- Our client’s query
- Sell it at a profit or loss
- What can you do with the loss?
- Timing
- Summary
What is Development Land?
We all know there’s a housing crisis out there. And a large part of the cost of a new home is the piece of land that the home is on. When we started studying Tax, there was a definition for development land. From what I remember it is land that has a value greater than its current use value. So, that brings us to a definition of current use value. This is a value that the land has for its current use only, on the basis that no development will take place on it. If the land is agricultural, it will have a value of say €10,000 per acre.
If that same piece of land sells for €100,000 per acre, then it is development land. In the sales price is the agricultural value of €10,000 and the development or hope value of €90,000. There can be arguments about what is the correct agricultural value. The price can fluctuate depending on the quality of the land and who wants to buy it. A good guide would be what other land in the area sold for before. You will need to get your auctioneer involved to determine the agricultural value.
Client’s query
I got a call from Tommy Nugent last Wednesday afternoon. Tommy inherited two acres of development land in Dungarvan in 2006 when his wife died. He also inherited Glanbia co-op shares that have since spun out to Glanbia Plc shares. At the date of death, he had a valuation of €300,000 per acre for the development land. He was recently approached by a local builder who offered him €225,000 per acre and he is thinking of selling. Tommy knows it’s a good offer as his current income from the land is €4000 a year. He wants to know the tax position if he sells.
Sell it at a profit or a loss
If Tommy sells at the proposed price, there will be a loss on the sale. A Capital Gains Tax computation will look something like this
| Sales Proceeds | €450,000 |
| Less costs of Sale | |
| Auctioneer, legal & Tax | €15,000 |
| Net Proceeds | €435,000 |
| Less cost | €600,000 |
| Loss on Sale | €165,000 |
If Tommy sells the land at €400,000 per acre, and assuming €25,000 of costs, the net proceeds are €775,000. This results in a gain of €175,000. The tax rate is 33%, so his CGT liability would be €57,500 approx.
Tommy was happy that he would pay no tax on the sale. His next question was about the loss. What could he do with that?
Loss – What to do with it?
In our call, I said that my first thought was that the loss could only go against gains on the sale of development land. I hadn’t seen this for a long time but said I would check it out. I was 100% wrong and happy to be wrong! Tommy can use the loss against gains on other assets. What he has in mind is selling some of the Glanbia Plc shares which will result in a gain. They have a very low base cost of €1 per share. The current share price is hovering around €12 per share.
Let’s assume Tommy sells 15,000 of his Glanbia shares
| Gain on 15,000 €11 per share | €165,000 |
| Less Loss on development land | €165,000 |
| Chargeable Gain | €0 |
What you cannot do is offset a loss you have, say from shares or property, against gains on development land. Let’s assume Tommy had a loss of €100,000 from the sale of AIB shares. He couldn’t offset that loss against a gain on the sale of development land. In Tommy’s case, it is a win-win situation. No CGT on the sale of the two acres and he can use the loss against the gain on the sale of the Glanbia shares.
Timing
Tommy needs to be mindful of the timing of the sales. Let’s assume Tommy sells the Glanbia shares now and realises his gain of €165,000. With his windfall he decides to follow the Foo Fighter on their World Tour. After visiting 5 continents and attending 56 concerts he falls in home in November 2022. The cash pile is a lot lower, so he decides to sell the two acres. There is a bit of over and back on the price and the owner of the building company is off skiing. They won’t be able to sign the contract until January 2023. This would be a disaster for Tommy.
He would realise the losses on the development land sale in 2023. He can’t carry back the loss in 2023 against the gain in 2022. Therefore, he would end up paying CGT of €54,000 on the share sales in 2022. He could carry back the loss if he dies in 2023. This could happen! Mary his new girlfriend has threatened to kill him if he follows the Smashing Pumpkins. They have got back together and are planning a world tour in 2023.
If he sells the land in the same year as selling the shares, he’ll be ok and be able to use the loss. Even if he sells the land in 2022 and doesn’t sell the shares until next year, he can carry forward the loss and offset it.
Summary
It was an interesting query that came in from Tommy. We had a similar one the week before from a farmer selling land next to a quarry up the country. The development land rules are unusual when it comes to losses and gains. There are a few other intricacies that you will need to be careful about too, so make sure you get good advice. It will be worth the investment.
Are you selling land or thinking about selling? If you want to make sure you get the taxes right call Deirdre on 051396703 or contact us
