Q. I am a property developer with significant unrealized losses on my residential property land bank. I understand that the use of these losses has been severely restricted and I cannot use them against future income. Is that correct?
A. The recent Finance Bill 2009 altered the income tax treatment of income arising from dealing in residential development land ) by abolishing the 20 per cent rate of income tax on such income with effect from 1 January 2009. From that date, normal income tax rules apply.
Following on from the above, new rules for the treatment of trading losses arising from a trade of dealing in residential development land have been introduced but only where, if profits had been earned from the sale of the residential land, the profits would have qualified for the 20 per cent incentive rate of income tax. In other words, losses from January 1 2009 are not affected.
Residential land losses prior to January 1 2009 must be converted into a tax credit, which is 20 per cent of the loss. The tax credit can then be set sideways in the year the loss is sustained against tax payable on your other income. Any excess tax credit may be carried forward and set-off against tax on the income from your residential land trade in subsequent years. If it was the case that dealing in residential development land is part of a larger development trade, any excess tax credit may be set against tax on the income from the overall development trade.
There is an exception to the new rules which applies where the claim for losses, either sideways or carried forward has been made to and received by Revenue before 7 April 7, 2009. In that case, the ordinary loss relief rules apply which are that a loss sustained in a trade may be set sideways against the person’s other income in the year in which the loss arises or may be carried forward for set-off against the income from the trade in subsequent tax years.