An overview of the taxation of residential property: is it a good idea?

Policy tool

Definition

Primary objective

Regulation

Taxation

ESA 2010

1.   Buying property

Refers to the one-off transaction tax for the sale of real estate either for the first time or subsequent times. It typically takes the form of stamp duty, VAT (first transaction), transaction tax, or capital acquisition tax. Purchase costs usually are not deductible in the tax declaration. This tax is widely applied in advanced countries as it is administratively appealing since transactions can often be reasonably easily observed. These taxes could also contribute to reducing asset price volatility. However, taxing real estate transactions may also lead to undesirable outcomes, such as adversely impacting labour mobility, reducing house affordability, and ownership ratios.

Value added tax (VAT)

VAT on the value of the property, sold for the first time

Generate government revenue

Reduce housing demand (especially speculative house purchases)

D.211

Stamp taxes / transfer tax

One-off - Transaction taxes

All investors (domestic / foreign); borrowers / equity investors

D.214 B, C

Stamp taxes

Taxes on financial and capital transactions

2.  Holding property

This involves recurrent taxes on property, usually levied at sub-national/local level. It has particular appeal as a source of local-government finance since property values will reflect the benefits of local public spending. This type of tax is somehow underutilised. It is attractive in the sense that the base is relatively immobile and hard to hide, the tax comes at the top of the hierarchy of long-run growth-friendliness mentioned earlier, and it can be made progressive through a basic allowance or by varying the rate with the value of the property. However, it requires some intense administrative build-up and maintenance of infrastructure. Income from owner-occupied property, whether in the form of imputed rental income or capital gains, is typically untaxed or taxed at low rates. It also includes recurrent taxes on net wealth (assets less liabilities), but they have been declining and only four countries are currently using them.^*

Recurrent taxes on immovable property

Taxes paid annually and linked to the value of the property.

Households: Current taxes on capital, other (D.59)

Other: Taxes on land buildings or other structures (D.29)

Generate government revenue

Finance regional/local level services

D.59 Current taxes on capital

Recurrent taxes on net wealth

Assets minus liabilities

Inequality

D.59 Current taxes on capital

Other recurrent taxes on property

Other recurrent taxes on capital

D.59 Current taxes on capital

3.  Renting property

Residential rental property is typically taxed on a comprehensive basis, in a similar way to interest income. No tax relief is provided upfront, and returns are taxed as they are earned-marked.

Rental income

Property Income and Personal Income Tax (PIT)

Generate government revenue

D.45 and D.5

4.  Selling property

When people sell residential property for more than the purchase price, they generally realize a capital gain that is subject to taxation as income. The capital gain is defined as the difference between selling and purchase prices, also known as the basis. Capital gains taxes on the sale of residential properties are treated differently depending on the holding period. Long-term capital gains relate to dwellings held for more than a year, and are usually taxed with lower rates and have a tax-free threshold for owner-occupied housing to protect household net wealth. Short-term capital gains are generated when the sale of the dwelling is made within a year, and are usually taxed with higher rates to avoid housing bubbles.

Other non-recurrent taxes on property

Capital gains taxes (occasional or exceptional levies on capital or wealth)

Inequality

Reduce housing demand and supply

D.91 Capital levies

5.   Bequest

This includes taxes on inheritances and gifts. The yield is usually relatively limited: rates are low, and exemptions and special arrangements create multiple avoidance opportunities. The yield in the countries with the highest returns (about 0.7% of GDP in Belgium and France) suggests its  potential as a revenue raising tool. The main policy objective of inheritance taxes is to limit the intergenerational transmission of inequality, but they also produce distortions, which are difficult to assess. Theoretical results on optimal bequest taxation differ widely, but Piketty and Saez (2013) find a positive and relatively high rate.

Inheritance and gift taxes

Death duties or taxes on gifts inter-vivos, to be levied on the capital of the beneficiaries

D.91 Taxes on capital transfers