The EACC, in partnership with the International Property Tax Institute (IPTI), wants to keep our members up to date with the latest developments in property taxes both in the USA and Europe.
IPTI has put together a selection of reports from recent articles contained in IPTI Xtracts.
The brief reports below cover New York and the USA, the United Kingdom, Italy, Portugal, Cyprus and Slovenia.
USA: New York City
- Tax Fairness: Recently, we noted the ongoing debate over how and whether to reform the manner in which taxes on coop and condominium apartments (a significant presence in New York City) are assessed for property tax purposes. Legislation enacted thirty-five years ago split the coops/condos and the “private homes” into separate tax classes employing separate assessment criteria. Homes are assessed once based on sales price but tax increases are then permanently capped, whereas coops/condo are assessed based on imputed rent and never capped. While the coop/condo sector rightfully has emphasized the unfairness of their tax burdens relative to those imposed on 1-3 family homes (a significant voter base whose tax increases are heavily capped, no surprise there), the fact that there are more pieces to this puzzle has recently been given true 3-dimensional treatment. At a recently opened exhibit at the Storefront for Art and Architecture in Soho NYC, the architectural design/research firm SITU unveiled a model designed to visually show the relationship between value for property tax purposes and sales value in the open market. The model shows buildings along the Upper East and Upper West Sides of Manhattan. Floating above it is an undulating acrylic canopy intended to show the distance between tax value and sales value. If you’re in the area it is worth the vist. If not, an informative description of SITU’s tax study and their unconventional 3-D rendering of it can be found on their website: http://www.situstudio.com/blog/
- Unjust Enrichment: A recently completed audit by New York City Comptroller Scott Stringer concluded that over a six-year period, the City of New York handed out $59.2 million in property tax exemptions to deceased individuals and ineligible corporations. The exemptions were aimed to assist senior citizens who owned their own homes or apartments. Due to a lack of oversight and quality control, these exemptions continued to attach either long after the individual owner passed away, or to non-qualifying corporations. Overall, 3,890 properties were found to have been unjustly exempted. In a total of six audits of the NYC taxing authority conducted since 2014, the Comptroller has identified almost $75 million in lost tax revenue. Following this most recent audit, the City has pledged to increase its controls.
USA: other states
- CALIFORNIA: An increase in real estate transactions and new construction, along with rising house prices, is expected to generate an additional $3 billion in property tax revenue this fiscal year, benefitting school districts and local governments around the state. As a result, Governor Jerry Brown’s prediction of a 5.6% increase in 2016-17 property taxes may turn out to be low.
- CHICAGO: A property tax rebate program established by Mayor Rahm Emanuel (some may remember him as US President Obama’s first White House Chief of Staff) was approved by the Chicago City Council this week. The benefit will flow to low-income hoemowners, with kickers for senior citizens and those with extra hardship. It remainds to be seen whther similar property tax relief will be extended to low-income renters, who may actually see their rents increased as a result ofg property tax hikes affecting their landlords.
- DETROIT: A report issued in 2015 by the Lincoln Institute for Land Policy studied the property tax system of Detroit, a once vibrant American City— and the center of automobile manufacturing—that was plunged into bankruptcy. The report issued a series of cogent recommendations for rebuilding that system, as well as examining how property taxes may have contributed to the City’s downfall. Property taxes being both a drag on the actions of the real estate sector, as well a vital economic engine for local government, Detroit may represent a good case study on what to do and not to do in designing a tax system. It also underscores the difficulties encountered when a government needs to only fix some aspects of its tax system yet also needs to avoid breaking something else in the course of that fix.
The full report may be viewed here:
A synopsis and update of the report may be viewed here:
United Kingdom: consultation papers on business rates
The UK government has published a series of discussion and consultation papers concerning business rates, the annual property tax on non-residential properties.
One, called “Check, Challenge, Appeal” refers to government decisions on “reform” of the business rates appeal system. Many commentators have criticized the proposals as unnecessarily complex, time-consuming and expensive.
Another paper is titled “Delivering more frequent revaluations” and looks at three options to “reform” the revaluation process. One is to reduce the interval between revaluations from 5 to 3 years using the same process as currently, i.e. the Valuation Office Agency (VOA) provides all the valuations. Another options is self-assessment with property taxpayers doping their own valuation s and the VOA carry out compliance work. The third option is the use of a formula-based approach instead of individual valuations.
The above papers follow on from a previous paper “Business Rates Review – Summary of Responses” published by the government at the time of the last Budget.
Two more, related, papers are “Business Rates Reform – Fair Funding Review” which is looking at assessing the needs of local government for future funding. Allied to this is yet another paper “Self-Sufficient Local Government – 100% Business Rates Retention” which has attracted widespread comment and concern.
For example, the Local Government Association (LGA) said: “This Government consultation is an important step on the road towards further retention of business rates, something which has been long called for by local government. It poses a series of open questions and it is important that the views of councils are heard and central in shaping how the new system works. This is vital to ensure it maximises the potential it offers to our local communities and businesses. It is important for the new system to be implemented in a way which balances rewarding councils for growing their local economies but avoids areas less able to generate business rates income suffering as a result. Decisions over which grants and responsibilities councils will have to pay for from any extra business rates income are also crucial. As well as consideration of the grants and services listed in this consultation, councils are keen that any new responsibility they agree to take should support their vital role in driving economic growth. Handing over responsibility for skills and transport services is the most logical fit as it would allow local areas to close skills gaps, improve public transport and boost local economies.”
In relation to property tax appeals, the LGA said “Councils have been forced to divert at least £1.75 billion from stretched local services in the past three years to cover the risk of backdated appeals – of which they have to cover half the cost at present. Under localised business rates, local government could be liable for 100 per cent of the cost of successful appeals. Improvements to the appeals system are also essential to avoid the need for them to divert such significant sums of money that could otherwise be invested into local services.”
United Kingdom: property tax revaluation casts cloud over solar boom
A recent article stated that businesses may have to take down their rooftop solar panels if the increase in valuation likely to result from the 2017 revaluation of business properties goes ahead.
Thousands of rooftop solar panels have been installed on supermarkets, car parks and other business properties since the former coalition government launched measures to boost green power in out-of-sight, unused spaces. But the drive is under threat, according to solar industry executives briefed on a proposed revaluation of commercial properties by the Valuation Office Agency due to take effect in April next year. The agency calculates the so-called “rateable value” of properties that is then used to set business rates. Its assessment of solar panel values would lead to a sixfold to eightfold rise in business rates that would make it “completely uneconomic” for companies to install such systems, said the Solar Trade Association. The association has calculated that a factory with a 100 kilowatt solar system that now pays about £350 a year in business rates faces a bill of up to £2,600 from next year. Many businesses have installed rooftop solar during the past five years, among them Greggs bakeries and car companies such as Jaguar Land Rover and Bentley. Sainsbury’s, the supermarket, had installed 100,000 panels across 210 stores by 2013, enough to cover 35 football pitches. The government’s energy department said it was liaising with the Valuation Office Agency and industry groups to consider any changes to solar panels and Mr Barwell’s association had been asked to “provide further information to us”.
The agency regularly reviews commercial property values and the last revaluation was done in 2010, the year ministers launched generous subsidies to help encourage companies to install solar panels. Since then, subsidies have been cut and the price of solar panel systems has dropped dramatically, leading some in the industry to expect business rates to go down. The rate of installations is still growing but excess capacity limits prices. The Valuation Office Agency said: “We are in continual discussions with industry bodies on how we assess different types of non-domestic property. We will be publishing draft rateable values on 30 September 2016.”
United Kingdom: MPs call for ‘internet levy’ to level business rates field
A UK parliamentary committee has recommended a levy on internet-only retailers in order to level the playing field against high street shops who have to pay business rates on their shops. The Commons local government committee published a report that recommended that in order to help increase revenue from business rates, the government should introduce a “transaction levy on internet retailers” to help “ensure that revenue from online businesses is captured by local government”.
Being very much up with the times, the committee of MPs noted that there had “been a recent increase in online businesses which, occupying premises with low rateable value or being home-based, pay low business rates in proportion to their turnover”. Public finance experts said this meant the companies were generating value but that it was not easily taxed by the current system and many local authorities have expressed concern that they were losing out on revenue from such businesses. Rate collecting agencies have suggested that the problem should be dealt with by a transaction tax, possibly operated by the retailers themselves as part of the selling process.
Northern Ireland: Hospitality and retail bodies want radical rates overhaul
Two of Northern Ireland’s best known business organisations have come up with what they are calling a radically reform to business rates. Hospitality Ulster and the Northern Ireland Independent Retail Trade Association (NIIRTA) have presented their plans, which they said could help alleviate high street dereliction, to the finance minister. They are proposing a tiered system which would relive businesses in some cases by 100 per cent depending on their net annual value (NAV). In a joint statement, Hospitality Ulster and NIIRTA said they were submitting “a radical alternative to the current system of small business rate relief which will be targeted to the independent retail and hospitality sectors. Both sectors make a huge contribution to our local economy, town centres and tourism,” they said. Our members consistently tell us that their rates bill is a significant financial burden on their businesses, restricting growth and on occasions forcing them to close.” They added: “Given that Northern Ireland has nearly twice the UK’s national average of levels of high street dereliction, we believe our rates plan will address this problem and begin to reverse this decline.”
The tiered system of reliefs suggested by the two bodies would see 100 per cent relief for those business with an NAV below £10,000. There would be 50 per cent relief for companies with NAV between £10,000 and £15,000 and 25 per cent for the £10,000 to £25,000 NAV bracket. “The total cost of this relief would be £36 million, which would mean that an additional £18m is needed above the £18m that it currently costs to provide small business rate relief,” they said. “In order to fund this additional £18m we recommend that the vacant property relief after three months should be reduced from its current 50 per cent to 15 per cent. Our scheme is fully costed and involves no new expenditure to the NI Executive Budget. It is value for the taxpayer, ensuring that the businesses who need help with their rates bill the most, receive it. Directly assisting our independent retail and hospitality sectors is in line with existing rates relief for manufacturing, agriculture and charity shops. Not only will our rates relief scheme be beneficial for many existing independent retail and hospitality businesses, but potentially assist new start businesses in our sectors with a substantial rates reduction helping reduce their start-up costs.”
Italy: IMU – a property tax that Italians will have to pay
The government has introduced a new tax, called IMU, better known as property tax, aimed at increasing revenue and providing better economic conditions for the country. IMU, an acronym that stands for Imposta Municipale Unica, to the English this means Local Property Tax, has been introduced to help lowering the price of rents through the taxation of vacant apartments. IMU is the tax that all real estate properties owners are supposed to pay in Italy, only religious buildings are exempt. This tax has replaced the former ICI tax on what in Italy is called “the first home” (main residence), which the Berlusconi government had eliminated. The tax calculation is based on a percentage of the value of each property, and it will be collected by the municipalities where the properties are located. Part of the tax will go to the national government. To calculate the IMU tax, take into account that in Italy each property has a cadastral rental value reported in the public deed of the property purchase. An increase on the cadastral value by 5 percent has to be added. The result then has to be multiplied by a coefficient that changes depending on the type of the property.
France: Local Rates Allowances in 2016
The income thresholds that entitle households to an exemption in their local rates in France have been revised upwards this year. All owners of property in France are liable to two local property taxes (rates) – the taxe d’habitation and the taxe foncière. Under certain conditions households are eligible for a reduction or complete exemption from the taxes. Different rules apply to each tax, although in each case the income thresholds that apply for complete exemption, for those eligible on grounds of low income, are the same. The maximum net taxable income (revenu fiscal de référence) to be eligible for complete exemption from the taxes in 2016 is as follows: Single person €10,697; Couple €16,409. The limits are higher if there are children or other dependant adults in the family.
In relation to the taxe d’habitation, the groups who qualify for exemption, provided they satisfy the test of resources, are:
- those over 60 years of age,
- disabled persons with entitlement to certain benefits,
- those in receipt of Revenu de solidarité active de base (RSA),
- widowed persons irrespective age.
In the case of both taxes, a capping mechanism is in place for those on a modest income who do not quality for complete exemption.
Portugal: property taxes that might require to be paid
A helpful guide has been published on the various types of property tax that might become payable.
Rental property If you own and rent out a Portugal property, the income is always taxable in Portugal, whether you are resident here or not. Portugal residents pay tax on rental income at a flat rate of 28%. You can add rental income to your other income for the year so it is taxed at the normal scale rates. However, this is unlikely to be beneficial if you pay tax at anything other than the lowest tax rate, currently 14.5%.
Non-residents pay tax at 28%; the letting agent must deduct this from the gross rent. Maintenance expenses and municipal property tax (IMI) may be deducted from rental income if they are documented.
Capital gains tax You will have to pay capital gains tax when you sell your Portuguese property, unless you bought it before 1989. Portugal residents pay tax on only 50% of the gain and, if you have had the property for more than two years, you get inflation relief. Gains are added to your other annual income and taxed at the scale rates of up to 48%. However, gains from selling your main home are exempt for residents if you reinvest all the proceeds (net of any mortgage on the property) in another main home in Portugal or the EU/EEA within 36 months after date of disposal or 24 months before. You will have to live in the new property within six months. Non-residents pay tax on the whole gain at 28%. An EU resident can choose to be taxed as a Portugal resident but you have to declare your worldwide income in Portugal to calculate the marginal rate of tax that will apply. Inheritance tax If you die owning the property, or gift it during your lifetime, recipients will have to pay Portuguese stamp duty at 10% regardless of your residency situation – unless they are your spouse or child, in which case they are exempt. Stamp duty is payable even if the recipient does not live in Portugal. Local and transfer taxes There are a number of other taxes you need to consider when you buy a property. First of all, you have to pay a transfer tax, known as IMT. What you pay depends on the ultimate use of the property and whether it is your main or second home. Then you have to pay stamp duty at 0.8% unless the sale is subject to VAT at the standard rate of 23% – this is charged on all new buildings. Stamp tax of 1% is also payable on all residential buildings worth €1m or more. Finally, there is IMI, the annual municipal property tax payable by whoever is the owner at 31st December that year. This is based on the registered value of the property and fixed by each municipality. The rates range from 0.3% – 0.8%, depending on the type, location and age of the property, although there are some exemptions available. For properties owned by individuals or companies resident in blacklisted jurisdictions, IMI is 7.5%.
Cyprus: Immovable property tax bill voted in
After weeks of debates and backstage deliberations, the House voted in favour of an immovable property tax proposal sponsored by EDEK, DIKO, Solidarity and DISY. According to the bill, property owners will pay 25% of the tax they paid last year if the tax is paid by October 31, 2016. The tax will be calculated according to 1980 property values, and the 25% that will be taxed will be according to the tax rates currently in place. This means that immovable property owners will essentially receive a 75% cut in the taxes they paid. If, for example, someone paid €100 in taxes last year, this year he or she will pay €25. In the event that the tax is paid between November 1 and December 31, 2016, the tax will increase to 27.5%, while for those who pay between November 1 and the end of the year will receive a 10% penalty on the tax rate sent to the tax payer. In addition, taxes up to €10 will not have to be paid. So, for example, those who paid €40 in tax last year, will not have to pay this year. Significantly, according to the bill voted by parliament, after 2017, the immovable property tax will be abolished. Preceding the vote was a heated discussion in which the parties expressed their individual views on the property tax. Common in what every party stated was the idea “unfairness”, either about using 1980 property values, or 2013 property values. In general, most parties found the idea of the property tax as being problematic in some way.
Slovenia: Renewed attempt at real estate tax coming shortly
The government will shortly unveil its blueprint for the introduction of a real estate tax. Preliminary guidelines revealed on Thursday indicate it will opt for a similar albeit more refined system than the scheme that was shot down by the Constitutional Court in 2014. Guidelines issued by a government real estate tax task force suggest the new system will be based on generalised market value of real estate. But unlike the system retracted in 2014 due to wildly differing estimates of market value, it will be based on better and more precise data. To improve the model, the task force suggested verification by international experts and subsequent scrutiny by a panel of domestic experts. To address complaints by property owners, a system will have to be put in place providing sufficient recourse, according to the guidelines. The Finance Ministry said the bill on the valuation of real estate would be presented “in the coming days”. The government wants to introduce a real estate tax in order to shore up budget revenue in an effort to balance the budget over the medium term. Instead of a real estate tax, Slovenia currently has a system of fees for the use of building land, which do not reflect the market value of real estate. The previous attempt at a real estate tax faltered in 2014, when the Constitutional Court ruled that key parts of the legislation forming the basis for the valuation of real estate was unconstitutional. There is broad consensus on the need to replace the current system, which is seen as rather outdated, but since the 2014 ruling governments have been threading cautiously. It remains unclear when the new tax could take effect. A recent report suggests 2019 is the target year.
Compliments of IPTI – a member of the EACC NY