The Ministry of Finance proposes the abolition of real estate acquisition tax UPDATE02
At its meeting on April 30, 2020, the government approved a proposal by the Ministry of Finance to abolish the 4% tax on the acquisition of real estate. Compared to the original wording, certain adjustments have been made in order to reach a coalition agreement.
Abolition of real estate acquisition tax
The real estate acquisition tax currently paid by the buyer at 4% of the value of the property should generally be abolished with effect from 1 January 2021. However, the proposal includes the abolition of this tax retroactively, even in cases where the Real Estate Cadastre made a registration entry during December 2019 or later. In this context, the taxpayer will have some choice. To this end, the transitional provisions set out a number of relatively complicated rules, which we summarize below.
Cancellation of mortgage interest deduction
The abolition of the acquisition tax is linked by the Ministry of Finance with other changes, which, on the contrary, are to the detriment of taxpayers. The possibility for natural persons to deduct interest from newly concluded mortgage loans and other loans to finance housing needs (e.g. loans from building savings) will be abolished. Therefore, it will no longer be possible now to reduce the income tax base by this interest. The abolition of the interest deduction will generally not affect already concluded contracts or those newly concluded, which will only refinance the existing mortgage loan. The application of these changes is interrelated (see below for more details). However, it is worth noting that the abolished possibility of deducting interest on mortgages and other loans for house purchase covered a much wider range of cases than those covered by the real estate acquisition tax (for example, renovation of a rented or used apartment, acquisition of membership rights in a cooperative, etc.).
Extension of the time test for the exemption of income from the sale of real estate
With effect from 1 January 2021, the time test for the exemption of income from the sale of immovable property not used for personal use immediately before the sale will also be extended from the current 5 years to 15 years. This proposal has been moved from the so-called tax package, which has recently undergone a review procedure. This rule applies not only to real estate held as an investment, but also, for example, to the sale of apartments in which the owner's parents or children live, real estate used for recreational purposes and similar purposes.
Retroactive effects of the law
The real estate acquisition tax will also be abolished retroactively, in cases where taxpayers are obliged to file a return for this tax by 31 March 2020 or later. This therefore applies to situations where the Real Estate Cadastre made a registration entry during December 2019 or later. For such properties, the above-mentioned extended time test for the exemption of sales income from five to fifteen years will already be applied. At the same time, taxpayers will no longer be able to claim the deduction of interest on a mortgage loan (and other loans to finance housing needs) taken to finance the property from the tax base from the 2020 tax period.
If the taxpayers who would be affected by the reversal have already paid the tax, the tax administrator will refund the tax to them.
Taxpayers may waive this reversal of the acquisition tax. In that case, however, they must expressly inform the tax administrator at the latest within the deadline for filing real estate tax returns (or within 30 days of the law coming into force) that their acquisition tax liability should not expire.Such a move may be of interest to taxpayers who, before 1 January 2021, acquired property that is exempt from acquisition tax (typically a new building) and financed it with a mortgage loan (or other housing loan). If they choose to apply the existing rules to the acquisition of real estate, the acquisition of this real estate will be exempt from tax, but at the same time they will be able to deduct interest from the mortgage loan for its acquisition. This possibility should theoretically also be considered by purchasers of real estate for investment purposes, who anticipate their sale in the medium term of 5 to 15 years, who could thus previously benefit from the income tax exemption under the current rules.
We will keep you informed about further developments on our blog.