Real estate tax: what will be changed, how will we pay?

Recently, the parliamentary committee on finance, tax and customs policy announced changes to the calculation of real estate tax. Vladimir Garkusha, partner of KAC Group, told the Ministry of Finance about why they want to change the tax and what is the essence of the innovations.

The Ukrainian budget is bursting at the seams. According to the Treasury Service, in October the state budget deficit amounted to UAH 30.44 billion, and in ten months it reached UAH 112 billion. In such conditions, the authorities are forced to look for additional sources of filling the treasury.

The focus is on internal reserves. Large and medium-sized businesses (through their owners) are planned to be additionally and heavily taxed through the adoption of a law on tax amnesty (Project No. 1232). And broad layers of taxpayers are waiting for innovations in the Tax Code regarding real estate tax.

Both the tax rate and its object will change conceptually. The idea is to get into the pockets of wealthy taxpayers who own large property or located in prestigious areas. The classic approach is “peace to huts, war to palaces!” But is it really so?

How we pay now

Now real estate tax must be paid annually by those who own “extra m2”. The norms are as follows: 60 m2 – for an apartment or apartments (regardless of their number), 120 m2 for – a residential building or houses (regardless of the number).

For example, the owner of an apartment of 72 m2. will pay only for 12 m2.

According to the law, the tax is calculated as a percentage of the minimum wage, but not more than 1.5% for each “excess” m2. Maybe less – the final rate is determined by the local authorities. And the amounts from the paid tax go to local budgets.

So, the hypothetical owner of an apartment with an area of 72 m2 will pay a maximum of 62.59 UAH for each of the additional 12 m2(4173 UAH x 1.5%). The minimum rate in Ukraine in 2020 is 0.01% or 42 kopecks.

What to prepare for

The main emphasis is, in fact, the change of the object of taxation: from the amount of excess m2, regardless of their location and the quality of the object, to the estimated value of this property. There are proposals to levy tax on the entire area of ??the property, i.e. do not take into account the “tax-free” 60 and 120 meters. The rate is reduced to 0.2% -0.3%. Then there will be no point in registering a bunch of “co-owners” in apartments / houses.

By the way, the “locomotive” of tax innovations in Ukrainian legislation – the chairman of the Verkhovna Rada Committee on Finance, Tax and Customs Policy Daniil Getmantsev owns an apartment of 59.95 m (data from open sources) does not reach 0.5 m to the threshold of the “prosperous home ownership “.

In this context, the most important message is the application of the assessed value of the property in calculating the tax. It is proposed to conduct an expert assessment of a taxable object every 5-10 years, taking into account its location, age, level and quality of construction.

Thus, for example, with 300 m2 on the Khreshchatyk street you will have to pay much more than with 300 m2 on the Cherkasy  main street. Whereas now the tax (all other things being equal) is paid the same. Again, this is a good ground for subsequent litigation regarding the objectivity of the peer review.

Property tax is a local tax, and its rate and collection are regulated by local authorities. It should be expected that with a large-scale increase in the volume of receipts to the local budget of such funds, local authorities will have a desire to more actively administer this process. First of all – to control the obligatory registration of lease agreements through housing offices and village councils.

It is worth noting that the innovations are proposed to tax non-residential premises – parking lots, terraces, annexes. And they are often used as rental property for rent. There are also MAFs.

It is also planned to tax objects (premises) not put into operation, but actually used. In some countries, such as Egypt, such “unfinished” houses have been in use for decades.

Also, profitable real estate does not provide tax benefits. In this case, disabled people, pensioners and large families are equal before him. Legislators quite reasonably identified churches, synagogues, datsans and other religious buildings as commercial real estate.

It is important to understand that in reality a very large number of Ukrainian citizens use real estate (and often does not bring active rental income) as an opportunity to preserve earned / accumulated money, not trusting banks, investment institutions, etc.

Given the narrowing of the rental market for real estate, such “rentiers” receive quite an active tax on passive assets. In addition, if there are more than five such objects in the property, then the tax coefficient 3 is applied from each subsequent one. However, it should be taken into account that the conditionally “extra” apartment is often the only source of income for elderly people with a pension of two to three thousand hryvnia.