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Real Estate Taxation

11Apr2016

Real Estate Taxation

There has been no shortage of events in the area of real estate taxation across the world since our last news round-up on this subject just over a year ago, and, broadly speaking, two trends remain in place: while Western governments continue to use property as a means to raise revenue, certain Asian governments are raising property taxes in an attempt to cool overheating real estate markets. However, the overall picture is perhaps not quite as clear as it was, as some countries pull out of their property market slumps faster than others.

 

Europe

We begin our round-up in Europe, where governments have typically fallen into the revenue-raising camp when it comes to property taxation, although there are signs that some are beginning to think of property taxes as market management tools as house prices begin to recover. The political situation in some countries is also confusing matters.

Greece

In December, the Greek Parliament narrowly ratified legislation for a new unified property tax.

The Government hopes that the tax, which will be applied to vacant lots, sports fields, farms and agricultural land as well as to residential and commercial properties, will raise around EUR2.6bn (USD3.55bn) per annum. However, former Minister for Public Order Vyron Polydoras described the tax ahead of the vote as “heavy and unbearable” and refused to toe his party’s line.

The tax was debated in Parliament as police clashed with farmers outside the building. Minister of Finance Yannis Stournaras argued that up until 2010 real estate in Greece had been undertaxed, and that it was unfair to say that land was now being overtaxed compared to other European countries. He also explained that the tax is designed to relieve the current burden on homes, shops, and businesses by imposing the tax in “a reasonable and proportionate way” on other land, in the interests of Greece’s financial objectives.

Under the new law, real estate properties are taxed by size and by other factors such as age or zoning. However, there will be exemptions for low-income households.

Ireland

Ireland is another bailed-out country which has been directed by the “troika” (the International Monetary Fund, the European Union and the European Central Bank) to apply a new tax on property in order to help stabilise the Government’s finances.

The Local Property Tax (LPT) is charged at 0.18 percent of the market value of properties worth up to EUR1m (USD1.35m), and at 0.25 percent on any excess value over EUR1m. Property values are organized into a number of bands, and the tax liability is calculated by applying 0.18 percent to the mid-point of the relevant band.

The 0.18 percent rate is fixed for the lifetime of the current Government, but a “local decision factor,” allowing local authorities to vary the rate by up to 15 percent, will apply from 2015.

In February, Ireland’s Deputy Prime Minister Eamon Gilmore said that he would support any councils wishing to cut the LPT in 2014. However, it has also emerged that compliance levels have been lower than the Government would have liked, and in February 2014 Ireland’s revenue authority announced that it will give property owners one final opportunity to bring their LPT and Household Charge (applied for a year before the LPT came into force) affairs up to date, before the launch of a nationwide compliance program.

Residential property owners who have so far failed to pay their 2012 Household Charge or 2013 and 2014 LPT, or have undervalued their property or claimed an exemption they were not entitled to, will be given until March 31, 2014 to put their affairs into order.

After this date, interest will be charged on outstanding LPT (including Household Charge arrears) at a rate of 0.0219 percent per day, from the date the tax was due. The Household Charge and the 2013 LPT were due on July 1, 2013; the 2014 LPT was due on January 1, 2014. Interest will also apply where additional tax becomes payable in cases where a property was undervalued.

France

In France, local governments are opting to use existing taxes to boost their coffers, and it was confirmed by the French Tax Administration recently that 66 out of the 101 departments in France elected to increase their house transfer tax rate from March 1, 2014. The tax is imposed on transactions involving older property.

The report shows that an individual purchasing an apartment for EUR300,000 (USD416,000) will have to pay EUR2,100 more this year in tax compared to 2013, while the purchaser of a EUR400,000 house will suffer additional costs of EUR2,800.

France’s 2014 finance law provides that local authorities may raise their departmental transfer tax from 3.8 percent to 4.5 percent between March 1, 2014, and February 29, 2016. The measure is intended as a revenue-raiser for cash-strapped departments, hard hit by budget cuts, and soaring welfare costs.

Italy

In Italy, much confusion has been generated over the Government’s intentions with regard to the local property tax known as IMU, which a previous administration wanted to extend to principal residences as part of its deficit reduction plans. The proposal proved highly controversial however, and in December 2013, the Government was finally able to confirm the cancellation of the second instalment of the IMU on first residences in 2013, which was due on December 16.

The complete cancellation of the payments of IMU on first residency payments (except for that on luxury homes) due in 2013, has been elusive to finalize, mainly because of a difficulty in finding all of the necessary EUR4bn (USD5.4bn) in separate and certain funding.

The decree providing for the cancellation of the first 2013 payment, which had originally been due in June 2013, was only issued in August. The decree to cancel the second and final payment was actually expected in October, but was also delayed due to the difficulty of funding it.

In the event, the Government has been able to eliminate, not only IMU on first residences, but also the tax payable on rural buildings and agricultural land, at a total cost of EUR2.15bn, and has funded the measure largely through increased taxation of the finance and insurance sectors.

On December 23, the Italian parliament approved measures providing for a new “service tax” to fund all local services, to be called IUC (the unified local tax) will be formed of IMU (levied on the remainder of property owned, including luxury and second houses and commercial and industrial properties.), TASI (a new tax on general local services) and TARI (the current local tax on environmental and waste services).

Spain

In Catalonia, the regional government has insisted that a new tax on empty homes is about tackling a chronic housing shortage rather than raising additional revenue.

The tax will be levied on banks owning properties vacant for two years, with rates varying depending on floor area.

The Government predicts that the tax will affect at least 15,000 flats owned by banks in areas designated as having an acute housing shortage. It anticipates that the average annual charge will be between EUR850 and EUR1,650 per empty property. The levy is forecast to generate around EUR13m in additional revenue, which will flow to support local housing policy.

The aim of the fee is to encourage banks that hold empty flats and apartments in their property portfolios to make them available for rent.

United Kingdom

As the UK property sector experiences its strongest upturn since the bust, the Government is already it seems attempting to take some of the steam out of the market with a series of new taxes, although they have been dressed up as fairness measures.

Predominately, these taxes are aimed at wealthy foreigners who have continued to invest heavily in London real estate with the result that prices in prime central London ended last year 7.5% higher, according to estate agency Knight Frank, with some areas of the city seeing home values rise by 15% in 2013.

So in his Autumn Statement, delivered to the House of Commons last December, Chancellor of the Exchequer George Osborne announced that from April, 2015, capital gains tax will apply to gains made by non-residents on the sale of residential property in the UK. The Chancellor’s justification for this was that it is “not right that those who live in this country pay capital gains tax when they sell a home that is not their primary residence – while those who don’t live here do not.”

The new measure follows the introduction of the Annual Tax on Enveloped Dwellings (ATED) first announced in the 2012 Budget which is designed to deter “non-natural persons”, i.e. companies, from being used as “corporate envelopes” to avoid Stamp Duty Land Tax, payable when a property is purchased in the UK, at a level dependent on the property’s value.

In tandem with the ATED, the government has also increased the rate of SDLT for enveloped properties to 15% and extended the capital gains tax regime to include the disposal of UK residential property by non-resident, non-natural persons for more than GBP2m.

Craig Kemsley, partner and London head of private client tax at Grant Thornton, said of the CGT measure that it was “important to bear in mind that this is not just a tax on rich foreign investors but will hit all non-residents including people who retire abroad and keep their UK property to rent it out.”

He thinks that the manner in which the tax is to be enforced and the money collected will be crucial in determining its success.

 

Asia

As mentioned above, certain governments in Asia have turned to property taxes in their attempt to avert real estate bubbles. However, in this region too there are certain local factors which are dictating property tax policies.

Hong Kong

Property prices in Hong Kong have been exuberant in recent years due to extremely low interest rates and abundant liquidity, and the tight housing supply situation. To address the overheated property market, the Government announced stamp duty hikes both in October 2012 and in February 2013.

In October 2012, the enhanced Special Stamp Duty, and the new 15 percent Buyer’s Stamp Duty (BSD) on resident properties purchased by those who are not HKPRs, achieved their purpose in driving down demand from non-residents, but prices in certain property market segments, particularly for medium-priced homes, continued to rise last year.

The Government therefore announced another round of general demand-side management measures in February 2013, including the doubling of the ad valorem stamp duty rates for all property transactions, while stamp duty for transactions of HKD2m (USD258,000) or below rose from a HKD100 flat fee to 1.5 percent of the transaction’s value, to combat speculative activities.

The increased cost of property transactions in Hong Kong finally appears to have succeeded in cooling the real estate market by significantly reducing the number of property purchases, government figures have shown.

The number of sale and purchase agreements for all building units received for registration for 2013 was 70,503, down by 39 percent compared with 2012 and by 35.2 percent compared with 2011. The total consideration for these agreements for 2013 was almost HKD456.3bn (USD60bn), a reduction of 30.2 percent compared with 2012 and 22.4 percent compared with 2011.

While Hong Kong’s property prices are still reported to have grown in 2013, the rise of less than 3 percent is a marked slowdown. With prices now predicted to decline in 2014, particularly for luxury residential properties, the Government appears to have been successful in the further measures it took in February last year to address what was then an overheated property market.

The Government has, however, consistently warned that it will not hesitate to use additional tax measures if prices continue to rise. It hasn’t been quite as clear in explaining when property transactions taxes will be reduced if the market should stabilize or prices should fall.

Singapore

With effect from January 12, 2013, Singapore’s government imposed a comprehensive package of measures to cool the residential property market, including, for the first time, the introduction of a Seller’s Stamp Duty (SSD) on industrial properties to discourage speculative activity in the industrial market.

The government had already implemented several rounds of measures to cool demand and expand supply, so as to moderate the increase in housing prices. For example, in December 2011, in addition to the standard buyer’s stamp duty of between 1% and 3%, it placed an Additional Buyer’s Stamp Duty (ABSD) at a rate of 10% on the purchase price or market value of residential property purchased by foreigners and non-individuals.

Permanent residents owning one and buying a second or subsequent residential property in Singapore pay an ABSD of 3%; and Singaporeans owning two and buying a third or subsequent residential property also pay a similar rate of duty.

The Government insisted in November 2013 however, that the vast majority of Singapore’s owner-occupied homes will pay lower property tax bills in 2014, as a result of the progressive property tax rates announced in the 2013 Budget.

More progressive property tax rates for residential properties are being phased in over two years from January 1, 2014, with the effect of raising property tax rates for higher-value residential properties. The largest hikes will apply to investment properties that are not occupied by their owners.

In fact, all owner-occupied Housing and Development Board (HDB) flats and three-quarters of owner-occupied private homes will pay lower property tax next year. In total, 95 percent of owner-occupied homes will see lower property tax bills, the Government claims. Also taking into account non-owner-occupied homes, 80 percent of all homes will pay lower property tax.

The Government also took the opportunity to tweak the stamp duty regime in the 2014 Budget, announced on February 21.

In Singapore, stamp duty is payable on instruments relating to the acquisition, disposal, lease or mortgage of real estate property, and on the acquisition or mortgage of stocks or shares.

Budget 2014 switched the structure of buyer’s stamp duty, share transfer duty, lease duty and mortgage duty from a Singapore dollar-based fixed rate structure to a percentage-based structure, effective February 22, 2014. In addition, with regard to lease duty, there are also changes to the basis of calculation to ensure consistency in stamp duty treatment across leases of different lease periods.

Taiwan

During a review of the luxury tax on the property market that has been in operation for more than two years, since June 2011, Taiwan’s Finance Minister Chang Sheng-ford confirmed that the Government has no plans for its abolition, although it could be subject to such a review every two years.

His statement came at the same time as doubts have been expressed whether the tax has been successful, with property prices still increasing more than incomes in Taiwan. Zhang expressed the view, however, that the tax has had a positive impact on the property market in curbing short-term property speculation and, thereby, reducing home prices below what they would have been without it.

The prime target of the luxury tax has been properties purchased for speculative purposes (rather than as a family home), and then sold on within a short period. Under its current terms, the owner of a property suffers a 15 percent tax on its sale price if it is sold within one year of its purchase, falling to 10 percent if sold during the second year.

The Government has already, in the past, admitted that the tax’s current structure, as it applies to real-estate, does not catch those wealthier speculative investors who can afford to wait for longer than two years before taking their profits.

More recently, Taiwan’s National Taxation Bureau (NTBT) has confirmed that the obligation to declare, on an income tax return, profits for an off-plan property transaction cannot be avoided merely because of the involvement of a non-resident.

The NTBT indicated that, if there is any income earned from the sale of off-plan properties (before the completion of construction), such income shall be included in the annual amount of consolidated income and be calculated for income tax, and the obligation does not vary due to the identity of the seller.

The agency pointed that out, with the housing market having flourished in recent years, various schemes have emerged, especially the purchasing of off-plan properties under another’s name, particularly through re-sale agreements with foreign connected parties. NTBT has therefore found that a small number of off-plan property buyers, focusing on short-term capital gains, could be liable, in addition to the due taxes, for substantial penalties.

South Korea

Bucking the regional trend is South Korea, which in April and August 2013 announced bills to cut taxes on home purchases in order to encourage a revitalization of the housing market.

With continued global economic uncertainty and the country’s property market remaining subdued, a capital gains tax exemption on buyers of homes valued at less than KRW900m (USD850,000) was maintained for all of 2013 in April, while, in August, a cut in property acquisition tax to 1 percent, from 2 percent, was reinstated on homes valued at less than KRW600m.

In addition, while the acquisition tax on the purchase of homes valued at between KRW600m and KRW900m would remain unchanged at 2 percent, the tax on those over KRW900m was reduced to 3 percent from 4 percent.

The acquisition tax cut was finally approved by South Korea’s National Assembly on January 1, 2014.

 

The Americas

United States

In addition to the exclusion of gain on the sale of a principal residence and the low-income housing tax credit, a number of different federal tax provisions directly affect residential real estate and the housing sector in the United States, but these are the subject of some uncertainty as Congress considers the issue of a comprehensive overhaul of the US tax code, which aims to dramatically reduce the number of special interest tax breaks and loopholes.

The deduction for state and local real property taxes are available to the roughly one-third of taxpayers who itemize their deductions, but by far the largest federal tax break for US property owners is the mortgage interest deduction (MID), which reduced federal receipts by about USD70bn in 2013 and by about USD380bn between 2013 and 2017.

In a hearing on the matter of federal property tax provisions last year, House Ways and Means Committee Chairman Dave Camp (R – Michigan) noted that “homeownership is an integral part of the ‘American dream’, and the US tax code has long provided a variety of incentives to make it easier for families to buy and own a home.”

“We also know that the real estate industry plays a large role in our economy. So, this is an area that needs careful, thoughtful review,” Camp observed.

Camp was at pains to point out that not every credit or deduction is a loophole. “The largest investment most people have is their home and policies like the MID have played a big role in home ownership,” he said.

However, Eric J. Toder, co-director of Urban-Brookings Tax Policy Center, commented that, as the MID is one of the largest tax subsidies in the US tax code, “achieving a revenue-neutral tax reform that reduces marginal tax rates significantly would be difficult or impossible to achieve without cutting back the MID or some other equally popular and widely used provisions.”

In draft tax reform legislation released by Camp on February 26, it is proposed that the maximum amount of loan interest that can be deducted for tax purposes be reduced from USD1m to USD500,000 over a four-year period. This, says Camp, “would preserve a substantial tax benefit for homeownership without affecting most taxpayers.”

However, with Republicans and Democrats still far apart on the basic aims of tax reform (the former want reform to be ‘revenue neutral’ while the latter want it to increase revenue), and with attention turning to November’s mid-term elections, it is thought unlikely that Camp’s proposals will be put before Congress in 2014.

– See more at: http://www.tax-news.com/features/Real_Estate_Taxation__571606.html#sthash.QCWbKZke.dpuf

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