Real Estate

Real Estate Taxman Cometh

Over the last few months, the issue of introducing a new real estate tax in Russia has been heavily discussed. And although the specifics are not yet clear, experts predict various possible ramifications from the new tax, from the livening up of the residential property market to rent hikes in the business and elite segments.

As of January 1, 2013, the existing property tax and land tax are to be replaced with the real estate tax, which, unlike those two, is to be calculated on the basis of a property’s market value. And while some different versions of applying the new tax are being discussed, one thing is clear: the new tax is likely to be substantially higher than what most people pay now.

Industry insiders say that the introduction of the new tax would bring about more order to the domestic property market.

“The idea of introducing a complex real estate tax has been under discussion since 2003,” Irina Shugurova, deputy general director of MIEL-Brokerage, told PASSPORT. “This tax is supposed to replace three existing taxes: the tax on individuals’ property, the tax on companies’ property and the land tax.”

According to Shugurova, some developments were triggered by the enactment of the law on the state registry of property in March 2008. She explained that under the previous legislation, land plots and buildings were entered into separate registries. “Now the law stipulates that land and buildings should be considered a single entity of property,” she said.

One major difference is that the existing taxes are based on some abstract evaluation of property, while the new tax is to be based strictly on its market value, which some predicted could lead to a major sale of property, on which people would not be able to afford to pay taxes.

Meanwhile, experts are cautious about the new tax’s possible impact on the residential property market. “I don’t think that the introduction of the tax could seriously make a difference in the capital’s residential property market,” Sergei Popravka, a lawyer at Penny Lane Realty, told PASSPORT.

He maintained that a massive sale of Moscow apartments by people who wouldn’t afford the tax is unlikely. “There is basically no alternative to Moscow,” he said. “It is unlikely that there will be at least ten people crazy enough to decide that the tax burden is too heavy an move to, say, Kostroma or Ivanovo.”

According to Popravka, if the government delivers on earlier promises to protect low-income owners of expensive property, the introduction of the tax may not have any significant impact even on the owners of apartments in the city center. “Show me one single person who bought an apartment in the centre for $5 million or $6 million and would want to sell it just to avoid paying a high real estate tax,” he said.

At the moment, the biggest question with regards to the new income tax is what privileges and to whom are going to be extended. Different options are currently under consideration.

Currently, the Russian government is in the process of developing a privilege scheme that is supposed to exempt lower-income population groups from a too high tax burden. Mikhail Mishustin, head of the federal tax service, recently told Rossiyskaya Gazeta that under preliminary plans, 50 sq. meters in an apartment or house where a person actually lives will be exempt from the tax.

The federal government plans to delegate the task of administering the new real estate tax to municipal authorities, who would spent the collected taxes on repairs and maintenance of residential neighborhoods. According to Mishustin, under the existing system, only between 15 per cent and 17 per cent of cash in municipal budgets comes from property tax collection, which is very little, compared with European Union countries, where the figure is about 75 per cent.

While details are being worked out, there is common understanding that owners of luxurious property will have to pay a higher tax than those who own modes economy-class apartments. “In the Moscow market, some criteria have been formed, based on which a property belongs to a particular class,” Shugurova said. “Apparently, townhouses in the centre of Moscow and apartments in residential complexes that have a separate infrastructure including underground garages and parking lots, swimming pools and fitness clubs belong to the higher classes of property, such as business, premium and deluxe, and higher rates of the tax have to be applied to them.”

Those who should probably fear the new tax most are people living on meager pensions in apartments whose current market value is exorbitant. “The classic examples are today’s pensioners that under the Soviet system obtained apartments in Stalin-era buildings in Western or South-Western Administrative Districts, say on Leninsky Prospekt or Universitetsky Prospekt,” Popravka said. “But, as far as I know, the government is closely working on a set of measures that would ease the situation of such social groups.”

Still, when it comes to economy-class apartments, their owners are unlikely to be substantially hit by the new tax. According to Popravka, under the law, the real estate tax could not exceed 0.1 per cent of a property’s market value per year. “For instance, a one-room economy-class apartment in a panel building near Vodny Stadion or Rechnoy Vokzal metro station sells at about 6 million roubles,” he said. “So, the income tax would be 6,000 roubles. And if we take an apartment that is twice as expensive, the tax would still be 12,000 roubles, which is comparable to what a [family] spends on the metro tickets.”

One key issue that comes into the picture is the calculation of the tax based on an apartment’s real market value, as opposed to the previous system under which a figure issued by the Technical Inventory Bureau (BTI) was used for calculations, a figure that often has nothing to do with anything.

Now, apartments will have to be evaluated by independent experts, and some people are worried about how accurate those evaluations are going to be. Still, experts don’t see big problems with evaluating apartments. “Based on the analysis of existing information I conclude that apartment owners are not going to be in a disadvantaged positions, and the evaluation of their apartment would most likely to be evaluated 20 per cent lower than the real market value is,” Popravka said, adding that the accuracy of evaluation is also going to depend upon the professionalism of the evaluators.

Still, the evaluation of all property in the country and entering it into a single registry is an immense work that is likely to take a lot of time and effort. According to Shugurova, “it will take more than one year, especially, given the fact that a procedure for evaluation of property is still being worked out.”

“The enactment of the law in a particular region of the country will only be possible if all the property objects in the region are evaluated and the results of the evaluation are approved,” she said, adding that only after that it would be possible to speak about actually collecting the tax.

While the impact of the introduction of the new tax on prices in the residential property market may be insignificant for those buying inexpensive apartments to live in, the impact on those who invest in apartments and on leaseholders may be more substantial. Apparently, if a higher tax is applied to apartments in which the owner is not registered, return on investment in such apartment is to decrease.

Similarly, if owners of the higher-end apartments have to pay higher taxes they may want to pass on the costs to those who rent from them. “I wouldn’t be surprised if rent goes up, as owners will want to pass their costs onto leaseholders, which I think would be fair,” Popravka said.