Tax cancellation: There are plans to exempt quick sales of residential properties from personal income tax

Pavel Bulgakov, a Managing Partner at ВКМР LEGAL, explained to Izvestia whether the innovation will help shake up the secondary homes market.

A bill has been submitted to the State Duma proposing to exempt the sales of residential properties from personal income tax regardless of how long the property is owned. Today, selling an apartment without paying taxes is allowed once it is owned for three or five years only. Parliamentarians believe that this rule should be abandoned in order to expand individuals’ opportunities to improve their housing conditions. Izvestia have investigated whether this initiative is going to help the secondary homes market.

How will the law affect the secondary homes market?

According to Cian.Analytics, secondary homes market demand in Moscow is currently continuing to recover. Total transactions in September 2022 increased by 7% vs August but decreased by 29% vs September 2021.

However, the gap in terms of annual changes is decreasing: it was at a level of 42–45% in spring due to expensive mortgages. 96.3 thousand contracts were entered into in Moscow during three quarters which is down 21% vs 2021, as Victoria Kiryukhina, an expert at Cian.Analytics, explained to Izvestia.

According to her, after the announcement of mobilization arrangements in late September and early October, demand declined by 20% vs early September followed by recovery to a level of 80% of the average value for 2021 by the end of October. Victoria Kiryukhina believes that the bill will exert a favourable influence on the secondary homes market demand where a large number of “alternative” transactions is involved when a new flat is immediately purchased instead of the sold one with the new one normally having a larger area and selling at a higher price.

“From a financial perspective, moving to a resale property will become more profitable for those who have acquired title to their flats not so long ago and are not able, firstly of all, to pay sales tax, and, secondly, rent real estate pending the completion of a new housing project”, she said.

According to her, today, 21% of flats offered for sale on Cian websites in cities inhabited by 500,000 or more people are located in houses built from 2018 through 2021, i.e., they fall under the five-year ownership restriction, not counting the fact that a portion of such flats are already exempt from taxes because more than five years have passed since purchase at the excavation stage.

Aleksey Dolmatov, a co-chairman of the Delovaya Rossiya Construction Committee and shareholder of GLIMS Production JSC, has said that the very idea may help revive the housing market and boost consumer activity; however, it is still necessary to establish a tax administration procedure for such transactions.

“The introduction of tax preferences for selling the only home (or a share in it) owned for at least three years has not been smooth”, he noted. “There were many cases when individuals sold their only flats and then received demands from their tax inspectorates requesting them to pay personal income tax. Such actions forced taxpayers to provide tax authorities with explanations and documentary evidence to prove that there was no income taxable with personal income tax and that they were not required to declare such income”.

Dolmatov believes that the legislative initiative will exert a favourable influence on pricing in the real estate market. Amid inflation, numerous transactions in residential properties are documented at lower prices than the actual price of the deal.

“This will also improve transparency and security of transactions since difference between the price specified in the contract and the actual sale price of the property is often paid by the buyer additionally”, he said. “On the other hand, once this initiative is implemented, it is possible that parties will start documenting prices that are higher than the actual sale price for the benefit of the buyer, for example, to get a higher tax refund”.

Pavel Bulgakov, a Managing Partner at ВКМР legal, believes that the adoption of the amendments will create prerequisites for boosting the primary homes market among other things by increasing the investment attractiveness of primary homes.

Bill for investors

Pavel Bulgakov said that it was rather difficult for mortgage banks to come up with a single optimal home resale restriction period since it depends on a number of factors such as market changes, changes in individual or family needs, etc.

Polina Pustyntseva also explained that there was no direct connection between the flat resale period and loan repayment period or scheduled payments.

“When a flat is purchased with mortgage loan proceeds for investment purposes, it will be sold once there is a need for money or when its price reaches the highest value allowing the seller to get the maximum profit”, she said. “Until 2022, the sale would occur in 6 to 12 months; nowadays, it is difficult to predict the timing, but we think it can happen in 24 to 36 months at the earliest”.

The full version of the article is available on Izvestia’s website