At its meeting on April 30, 2020, the government approved the abolition of the 4% real estate acquisition tax and related changes in the Income Tax Act. The content of the proposal of the Ministry of Finance is described below. However, there are likely to be some adjustments to this wording as a result of the coalition agreement. According to the media, the change should concern the maintenance of the tax deduction of interest on real estate acquired until the end of 2021. The time test for the exemption of income from the sale of real estate should be extended to 10 years (compared to the originally proposed 15 years).
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 in the ministerial proposal 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, according to media statements after the government meeting, the abolition of the tax deduction of interest should be postponed compared to the ministerial proposal until the acquisition of real estate in 2022. It would therefore provide an advantageous period until the end of 2021, when and at the same time it would be possible to deduct interest from the income tax base on the loan drawn down for its acquisition.
However, it is worth noting that the abolished possibility of deducting interest on mortgages and other loans for house purchase will cover 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 10 years. However in the ministerial proposal, which was moved from the so-called tax package, and which recently underwent a review procedure, 15 years was proposed. 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 by law, 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 ten years will already be applied. Pursuant to the ministerial proposal, at the same time, taxpayers already from the 2020 tax period will not 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. As mentioned above, however, the possibility of deducting interest is likely to change in the form of a postponement of its cancellation only for cases of financing real estate acquired in 2022 and thereafter.
If the taxpayers who would be affected by the retroactive cancellation have already paid the tax, the tax administrator will refund the tax to them.
Taxpayers may waive the retroactive cancellation 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.
If the possibility of deducting interest for real estate acquired is not announced before the end of 2021, such a step will be interesting 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. The possibility to waive the cancellation of the acquisition tax should theoretically also be considered by purchasers of real estate for investment purposes, who anticipate their sale in the medium term of 5 to 10 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.