IPTI | Property Tax in the News – January 2024

IPTI’s usual monthly newsletter – the “President’s Message” – contains, inter alia, some summarized news articles from around the world. This IPTI publication – “Property Tax in the News” – contains some of the more interesting news articles concerning property taxes in North America and Europe which is where many of our members have a particular interest. Links to these and more, similarly summarised, articles – from North America, Europe and around the globe – can be found in “IPTI Xtracts” on our website: www.ipti.org. Please note that these are news articles; they do not necessarily reflect IPTI’s views.

USA

New York: NYC property tax system, called unfair by advocacy groups, likely to stay in place Procedural problems have been the lynchpin holding up a lawsuit that seeks to overturn New York City’s property tax system. And procedural problems with the lawsuit may be why the state’s high court leaves the system in place.

New York’s high court heard arguments recently that sought to strike down New York City’s method of taxing residential properties, a system critics say punishes minority neighborhoods and rewards wealthy, predominately white ones. But it is unlikely to overturn the decades-old system.

The legal challenge began in 2017 when an advocacy group comprised of developers, homeowners and civil rights groups sought to overturn the city’s labyrinthine property tax methodology. In the complaint, advocacy group Tax Equity Now NY claim the city’s property tax assessment system unconstitutionally taxed similar properties at different percentages of value. Some tax abatements and caps on assessments were doled out to condos and cooperatives instead of rental housing since 1981, giving those properties unfair advantage.

While industrial and commercial buildings in New York City are taxed relative to their zoning type, residential buildings are split into two groups: properties with three or fewer units, and larger buildings with four or more units. The former class of residential property is taxed at 6%, while other properties are taxed at 45%. However, because condos and co-ops are taxed relative to the value of units, including those that are rent-stabilized, which can lead to lower assessments.

The result of the discriminatory law, Tax Equity claims, is that some minority neighborhoods are taxed much higher than properties in predominately white neighborhoods. The group has said the 6% assessment cap on many homes has created a caste housing system in New York City.

In 2020, a trial court dismissed the due process claims. Months later the state’s appellate division dismissed the remainder of the claims, ruling the plaintiffs failed to state a cause of action. The appellate court also found the tax abatements and assessment caps had been created to protect homeowners from “sudden dramatic tax increases.”

In their appeal, Tax Equity argued the courts wrongfully dismissed the case during the pleading stage, thereby “cutting off discovery and the opportunity to crystallize the legal principles at issue.” The plaintiffs also say the city and state essentially insist that even though the property tax system is grossly inequitable there is nothing courts can do about it.

Attorneys for the city countered the complaint was nothing more than a compilation of complaints about New York City’s real property tax system. “The fact that the tax system has been described as imperfect and in need of reform does not establish that it is unlawful,” the city argued.

During oral arguments Tuesday, the Court of Appeals tried to navigate the maze of city and state regulations to determine whether to reinstate Tax Equity’s lawsuit. If the high court rules in favor of the group and reinstate the case, the city’s decades-old property tax code could be upended.

“The problem isn’t the statute,” argued Richard Bress of Latham & Watkins, who represents Tax Equity. “It is how the city is interpreting and applying it.” Tax Equity is suing both the city and state, and Bress argues Legislature has already spoken on the issue and that it is now squarely in the judicial arena. He also noted the city can simply lower its assessment ratio to help out the Class-1 properties.

“Perfection is not something we can reach as humans,” Bress said, noting tax assessors are going to reach different conclusions regarding separate properties. “But we think it’s a different case when the city purposefully chooses to apply the caps with a consequence … of creating this uniformity.”

During questioning of Bress and also the state’s lawyer, Mark Grube of Cleary Gottlieb, judges suggested the city could use its discretion to change the taxes without changing the law. “Is there anything in the state law that would prevent the city from reducing the assessment ratio for Class 1 tomorrow from 6% to 0.6%?” Chief Judge Rowan Wilson asked.

Grube said that would be consistent with state law. Questions by Judges Jenny Rivera and Shirley Troutman also seemed to indicate they would be open to allowing the city to change the taxes without a change to the law.

The attorney for the city, Edan Burkett, claims the advocacy group hasn’t identified any constitutionally protected right and that the situation is incredibly complex, given that the city was still using land values from the 1960s and construction costs from the 1930s when the new law was passed in the 1980s.

“Here what we have are duly passed state statutes,” he argued. “And the appellants simply haven’t pointed to a specific policy, some sort of any aberrational policy, which is significant. What they’re pointing to is the outcome of a taxing system that is being enforced in compliance.”

 

CANADA

Quebec: Climate change battering municipal finances across Canada

The hamlet of Gore, Quebec, had the foresight to start preparing for more intense annual flooding due to climate change a decade ago. That’s when the rural township 60 kilometers northwest of Montreal began quadrupling the size of its culverts to accommodate greater water flow under its roads.

But that still wasn’t enough to withstand the 2023 flood season.

“We ended up losing three roads at a cost of close to $1 million,” Gore Mayor Scott Pearce said in a recent interview. The town’s annual budget is around $6 million.

Gore is one of scores of Canadian municipalities whose budgets are being squeezed by climate change. As high inflation eats away government revenues, cities and towns are increasingly being battered by historic fires, flooding, heat and ice storms, and having to dispense additional sums to guard against severe weather and clean up in its aftermath. Municipal officials are warning that they’ll be unable to absorb growing weather-related costs without more money from the federal and provincial governments.

“Municipalities of all sizes across the country, we’re seeing the amount of damage — it’s unbelievable,” said Pearce, who is also president of the Federation of Canadian Municipalities. Provincial and federal governments must invest more, he said. “We’re seeing more and more damage year by year.”

Montreal, Ottawa and Regina are among the cities where severe weather has threatened balanced budgets in the last year.

In Regina, unexpectedly significant snowfall events and resulting road maintenance costs at the end of 2022 produced an operating deficit “for the first time in corporate memory,” the city’s financial strategy director, Barry Lacey, told its executive committee in May. Chris Warren, the city’s roadways and transportation director, directly linked the growing operational costs in his department with climate change.

Officials in Ottawa warned in September that the city was on track to finish 2023 with a deficit after blowing through its public works budget to dig itself out from snowfall and freezing rain spells at the beginning of the year that were “substantially higher” than five-year averages.

And in Montreal, expenses tied to extreme temperatures and torrential rainfall were among the factors that led the city scrambling to limit costs at the end of 2023.

Quebec’s island metropolis has been increasingly inundated with water-related challenges – some of the most visible and costly local consequences of climate change, says Maja Vodanovic, Montreal executive committee member responsible for waterworks.

In addition to flooding shores, underpasses and basements, more intense precipitation is flushing higher amounts of detritus into the St. Lawrence River, where it’s drawn into the city’s water filtration system, which in turn requires more purifying chemicals, Vodanovic said.

In the winter, volatile freeze-thaw cycles have forced the city to lower the snowfall threshold that triggers snow removal operations to prevent dangerous ice formation.

On top of these extra operational costs, Montreal has earmarked hundreds of millions of dollars for rainfall mitigation measures, such as water-absorbent parks.

Vodanovic says it will be difficult for the city to keep up with climate change-related costs without more money from the provincial government and new revenue sources beyond its traditional property tax base. Montreal is increasing residential taxes by 4.9 per cent in 2024.

“It doesn’t allow us to do a lot more,” Vodanovic said in a recent interview. “Everything that we have to do more we’re squeezing in other departments.”

Further east, the Quebec town of Sutton is dealing with another water problem: too little of it. Drought and a population increase have in recent years diminished the ponds that supply drinking water to what’s known as the town’s mountain sector, a popular ski destination.

Last year, officials ordered a freeze on all construction projects in the area in an attempt to conserve water, halting plans for hundreds of new residences, Sutton Mayor Robert Benoit explained in an interview.

The town has had to spend tens of thousands of dollars on studies to evaluate the problem, he said. The latest study, published this month, concluded that underground water sources in lower-lying sectors could sustainably supplement the mountain supply. However, pending further engineering studies, the town estimates the construction of new water conduits will cost up to $20 million.

Benoit anticipates that with grant funding and additional levies on developers Sutton will likely be responsible for only a fraction of that sum. But with flooding, wildfires, wind and ice storms, climate change-related costs are piling up for the municipality, the mayor said.

“What we have to do is tax the citizens. And taxing the citizens, every time we do it, well, it’s not a big party,” he said.

Sutton and Montreal are among the Quebec municipalities requesting $2 billion more per year from the provincial government to pay for climate change adaptation measures. Premier Francois Legault has committed far less: roughly $1.8 billion over five years.

Investments could help save municipalities from exploding costs as weather worsens, Pearce said. “We’re better to invest now to protect against this because otherwise we’re just throwing money away,” he said. “It’s a lot cheaper to buy Flintstone chewable vitamins than pay for your penicillin after you’re sick.”

 

Ontario: New Year, New Tax: Luxury Homes in One of Canada’s Priciest Cities Just Got More Expensive

Toronto’s municipal land transfer tax will soar on properties worth more than C$3 million. Buying a high-end home in one of Canada’s costliest housing markets is about to get even more expensive.

Now effective, Toronto’s municipal land transfer tax – paid by buyers upon the purchase of a home – will soar on properties worth more than C$3 million (US$2.2 million). It’s a move that could momentarily pause the city’s luxury market and be a boon to sellers in its affluent suburbs as buyers look to avoid the tax.

The Toronto City Council approved the taxes in September as part legislation aimed at shoring up the city’s budget.

“Depending on what the house is worth, you’re getting into double or triple the original amount of the tax,” said Mike Clark, a lawyer specializing in real estate at Toronto firm Korman and Co. Instead of a tax of 2.5% for any property over C$2 million, the top rate will now reach 7.5% for homes worth more than C$20 million, Clark said.

As a result, the buyer of a C$20 million house will pay a one-time transfer tax of C$1.5 million to the City of Toronto – up from C$500,000 in 2023.

Ontario’s 2.5% land-transfer tax, a separate fee paid by all home buyers in the province, will not change, Clark said. Toronto is the only city in Ontario to charge a municipal land transfer tax on top of the province’s.

The new taxes will escalate with the cost of a home, starting at 3.5% for homes worth C$3 million and topping out at the 7.5% rate.

So far, the tax hike hasn’t deterred his home-buying clients looking in the new year, Clark said.

“A few people who were contemplating larger purchases moved them forward. I had one guy at C$3 million who didn’t care,” he said. “A lot of my clients at the high end are showing up with huge amounts of cash, so the tax is annoying, but they’ve got the money.”

Cailey Heaps, president and CEO of Heaps Estrin, a Toronto property agency that specializes in luxury homes, noted an increase in closings at the end of the year to get ahead of the tax. “It’s less meaningful at the C$3 million range but definitely felt above C$5 million,” she said.

The tax comes as another blow to a sluggish market beset by record-high mortgage rates and a Federal ban on foreign buyers, Heaps said. “It was shocking that the city introduced this into what’s already a struggling market. We already tax people so heavily for the privilege of buying a home. This also doesn’t solve the housing issue. These are not houses first-time buyers go after.”

A search on Canadian real-estate site Point2Homes revealed 102 houses in Toronto with asking prices of more than C$5 million. In November, the average selling price in Toronto was C$1.08 million – “basically flat” year over year, according to the Toronto Regional Real Estate Board (TRREB), an industry group representing the entire market. The average selling price was down 2.2% month over month.

Paul Baron, TRREB’s president, is also critical of the tax. “Our position has always been that the concept of a land transfer tax doesn’t benefit home buyers, due to the unfair nature of the tax, which has to be paid upfront,” he said in an e-mail.

In fact, the tax may further complicate the city’s dire housing situation, Baron said. “Council’s decision may impact our housing challenges and supply shortage in a negative way by deterring move-up buyers from freeing up supply,” he said.

But Paul Maranger, co-founder of the Paul & Christian Associates luxury property agency in Toronto, was more sanguine.

“We may see a pause at the top end, because even though buyers can afford a few hundred thousand dollars extra, it hurts psychologically,” he said. “But this tax will still be one of the lowest in the world.”

According to global tax consultancy UHY, Belgium has the highest average property purchase taxes of any country for real estate worth the equivalent of US$1 million, at 11.3%. The global average is 3.3% for properties in this price bracket, UHY noted. The U.S. levies just 0.6% on average and – in contrast with its largest city – Canada charges an average 1.8%.

Affluent Suburbs to Benefit

Municipalities like Mississauga and Oakville – nearby, but outside Toronto’s city limits – could benefit from the new fees, Maranger said, since they don’t impose their own land-transfer taxes. “The purchaser might say, ‘I’m just going to move half an hour out.’ But the benefit will be short- term” as buyers become inured to the tax, he said.

Toronto’s home purchasers will eventually see the tax as “the cost of doing business,” said Jordan Weinberg, a partner at Toronto accounting firm MNP. “They won’t be happy about it, and I don’t think it’s fair, but it won’t stop people from buying in Toronto.”

The broader effect is that “local taxes seem to be ramping up on targeting high-income earners,” Weinberg said. In January, Toronto is also tripling its so-called Vacant Home Tax to 3% of a home’s value; the tax affects homes that are not principal residences and unoccupied more than six months in a year. According to the CBC, the city is also considering a separate land transfer tax on foreign buyers.

In the long run, steeper taxes will affect few purchasing decisions at the luxury end, said Joanna Lang, a managing partner at Outline Financial in Toronto and who specializes in high-value mortgages.

“A luxury house is a discretionary purchase. What drives buyers is wanting to be in a specific neighborhood, on a specific street,” she said. “Will it be more expensive and painful? One hundred percent. Will that buyer move to a different region because of this tax? I doubt it.”

EUROPE

Portugal: What Property taxes are there in Portugal?

Buying or owning a property is a big step that typically involves a substantial long-term financial commitment. Property taxes in Portugal are levied on the purchase, holding and sale of real estate assets.

This article will outline the basic tax implications for each of these moments and what you can expect should you decide to sell your property.

Buying property

You are not required to be a Portuguese resident or have a residence permit to acquire real estate properties in Portugal.

However, even as a non-resident, you will have to obtain a Portuguese Tax Identification Number (NIF), and in case you are a non-EU resident, you will have to appoint a fiscal representative if you purchase/own a property in Portugal.

When acquiring a real estate property in Portugal, the following taxes will apply over the tax value or the acquisition value (whichever is higher) of the property:

• Real Estate Transfer Tax (IMT) – up to 7.5% depending on the type of property: primary or secondary accommodation, plot of land for construction, commercial property, or rustic land. A special aggravated 10% rate applies to properties acquired by companies resident in blacklisted jurisdictions.
• Stamp duty (IS) – a rate of 0.8% is applied to the same value used to assess IMT. Limited IMT exemptions are foreseen in the Portuguese tax legislation, such as those applicable to urban rehabilitation. A case-by-case analysis is recommended to assess whether each project qualifies for this or any other tax benefit.

In addition, you should also consider the notary and registration fees, which should range between € 750 and € 1,500. The IMT, the IS and the notary/registration fees are due on the day of the final deed of acquisition.

Holding property

Following the acquisition, as you own a real estate property, you are liable to the annual payment of the following taxes:

• Municipal Property Tax (IMI) – between 0.30% and 0.45% over the tax value of an urban property (different rates apply to rural property). A special aggravated 7.5% rate applies to properties owned by residents in blacklisted jurisdictions (you can see the complete list here).
• The IMI is payable in up to 3 instalments (in May, August, and November) by owners of real estate properties on December 31 of the previous year.
• Additional to the Municipal Property Tax (AIMI) – the AIMI is levied on the sum of the tax values of the properties held by a taxpayer on 1 January of each year. In the case of individual ownership, a deduction of € 600,000 to the taxable base of AIMI is allowed. Married or cohabiting couples who opt to submit a joint tax return are entitled to deduct up to € 1,200,000 from the VPT sum of all their urban holdings.

There are currently 3 rates of AIMI:

• 0.7% for a real estate portfolio valued between € 600,000 and € 1,000,000.
• 1% for a real estate portfolio valued between € 1,000,000 and € 2,000,000.
• 1.5% for a real estate portfolio valued above €2,000,000.

An aggravated AIMI rate of 7.5% is applicable to properties owned through a company based in a blacklisted jurisdiction. Properties classified as “for services”, “commercial or “industrial” purposes are not subject to AIMI. The AIMI is payable in a single instalment in September of each year.

Selling property

Until recently, Portugal would tax the gains from the disposal of Portuguese-situs real estate differently according to the tax residence of the seller. However, this distinction has been eliminated as of 1 January 2023, and now capital gains resulting from the sale of Portuguese situs real estate are taxable only over 50% of its value at the general progressive personal income tax rates.

UK: Politicians don’t listen to us, say store bosses

The bosses of many of Britain’s biggest store chains have joined forces to call on the Government to provide urgent support for the High Street – including help on business rates and a clampdown on shoplifting.

Until recently, Portugal would tax the gains from the disposal of Portuguese-situs real estate differently according to the tax residence of the seller. However, this distinction has been eliminated as of 1 January 2023, and now capital gains resulting from the sale of Portuguese situs real estate are taxable only over 50% of its value at the general progressive personal income tax rates.

UK: Politicians don’t listen to us, say store bosses

The bosses of many of Britain’s biggest store chains have joined forces to call on the Government to provide urgent support for the High Street – including help on business rates and a clampdown on shoplifting.

Stuart Machin, chief executive of Marks & Spencer, said this weekend that politicians neither ‘understand nor value’ the importance of the retail sector to the economy. He blasted ‘inaction’ and ‘increasing regulatory burdens’ for curbing investment in jobs and growth in the industry. His frustrations are echoed by Alex Baldock, chief executive of the Currys electrical chain.

Nish Kankiwala, chief executive of the John Lewis Partnership, called for a long-term growth plan along with reform of business rates.

Richard Walker, boss of the Iceland frozen food chain, said: ‘We need more sane economic management from the Government, offering a breath of fresh air to clean up the damage inflicted by high inflation.’

The heads of pharmacy chain Boots and the Co-op are both demanding tougher action to combat shoplifting and violence against retail staff. Machin, who has presided over a revival in the fortunes of M&S, told The Mail on Sunday: ‘I don’t feel that politicians understand or value British retail, and that’s a problem.

‘It’s a sector that employs over 3 million people – that’s 10 per cent of all jobs in Britain – and accounts for more than 5 per cent of our entire economy and pays £17billion in business taxes.’

He added that reducing these pressures would allow retailers to ‘invest in jobs, in skills and in growth – the very things that will get Britain’s economy out of the slow lane’.

Baldock, of Currys, said the High Street is facing a perfect storm of cost increases that could undermine the fight against inflation.

The National Living Wage for workers over 23 will jump 9.8 per cent to £11.44 per hour from April. Those aged 21 and 22 will be paid the same for the first time – amounting to a 12.4 per cent increase.

The rises in salaries come hand-in-hand with a near-£500million increase in business rates bills for the High Street.

Baldock said: ‘It is going to be counterproductive and will leave inflation higher for longer. It’s not good for employment or investment. Retail is already overburdened.’

Kankiwala, of John Lewis Partnership, said: ‘We need certainty and consistency to give businesses the confidence to invest. There has to be a proper plan for long-term growth that takes us beyond the political cycle.

‘For retailers like the John Lewis Partnership, the tax burden has to be fairer so the Government must prioritise business rates reform.’

Business rates, which are charged on commercial buildings such as shops and pubs, are a key gripe for retailers as they are based on property values rather than financial performance.

The levy has been repeatedly criticised for being outdated, unpredictable and for giving online retailers an advantage over the bricks-and-mortar stores on the High Street.

Many leading retailers also criticised the apprenticeship levy, which Machin described as a ‘missed opportunity’ to improve skills among the British workforce.

Shirine Khoury-Haq, boss of the Co-op, said the ‘current flawed system’ for the apprenticeship levy meant £600million of funding had been sent back to the Treasury when it could have been ‘used for good’.

Khoury-Haq and Sebastian James, managing director of Boots, were among a number of major retailers who highlighted the need for action against shoplifting and assaults on store staff, which have been surging this year.

Many leading retail bosses have backed the Mail’s campaign to scrap the tourist tax, where overseas visitors are charged VAT on purchases made in Britain. This has so far fallen on deaf ears.

 

Compliments of IPTI – a member of the EACCNY.