Property tax to relieve fiscal stress
The introduction of a 19 percent VAT on new buildings would limit taxevasion and market speculation, says the government

ILIAS SIAKANTARIS

FINANCE Minister George Alogoskoufis unveiled on August 2 the long expected draft bill on property taxation that would impose, among other things, a 19 percent VAT tax on new buildings after 1 January 2006 and a capital gains tax on the resale of property. It is widely expected to pass in the Autumn.
The government said that the change in the property tax system is designed to combat tax evasion and real-estate market speculation. The intent is for the new VAT tax to force developers to ask for invoices for all material and works provided, while the capital gains tax would discourage profiteering on real estate and protect the market from irrational spikes.
While the new system is expected to increase tax revenues, an estimate on the extra burden to taxpayers cannot be calculated until the end of December, when the finance ministry will announce the new list of objective values, a table of indicative values per area on which property taxation is based.
Alogoskoufis said the upwards adjustment on these values will be "smooth". However, sources with the ministry said that objective values - currently standing way below market prices - could increase by as much as 50 percent.
The draft bill ensures that first-time buyers would not be affected by the 19 percent VAT, but they would continue to be subject to the 11 percent transfer tax. The same tax would apply to older properties, built before 2006.
The transfer tax for new properties that are subject to the VAT would be scrapped. Instead, buyers would pay a one percent tax in the form of a transaction fee, plus a capital gains tax.
The capital gains tax, which would come into effect after 1 January 2006, would have a diminishing rate, set against the number of years the property was held by the seller. If a seller chooses to part with his property after less than 5 years of ownership, he would be taxed 20 percent of the price difference, 15 percent if the ownership period is from five to 15 years, five percent if he sells after 15 to 25 years of ownership. There would be no capital gains tax on properties owned by the seller for over 25 years.
The bill increases the tax-free portion for inheritances and property transfers from parents and grandparents to children from 20,000 euros to 80,000 euros. It also extends the payment period for inheritance taxes from 24 monthly instalments to 24 bi-monthly instalments.
The draft bill does not make changes to the Large Property Tax. The association of property owners (POMIDA) complains that if the tax exempt portion remains at today's levels while property values are assessed upwards across the board, then soon almost half the Greek tax payers will be considered big landowners and subject to LPT.
Opposition Pasok called the new proposals 'tax squeezing'. Party spokesman Nikos Athanassakis said that the government is imposing new taxes "under a state of panic over the black hole (of the budget) that it feeds daily with its policies". The government replied that Pasok also introduced VAT on properties in its own programme.
The prospect of the new taxes, which is widely expected to push up property prices, has sent thousands of prospective developers to the urban planning directorates in recent months to apply for building licenses with a 2005 date, and even more prospective buyers to real estate agents across the country.
This sudden flourish of activity has given a boost to this year's beleaguered state finances: the increase in real estate transactions is increasing property tax revenues for 2005 and easing the huge revenue gap that the finance ministry faces. The government is pulling in the revenue, as people rush to buy and sell in order to benefit from the current tax regime before it expires.
In recent years, news of upward adjustments of objective prices have consistently heated up the property market and brought in state revenues during the announcement year.
The Technical Chamber of Greece (TEE) points out that although the introduction of a VAT system on property is a sound measure, its burden should replace that of taxes currently imposed. However, the proposed 19 percent rate is pitched too high for TEE, which estimates that property would be burdened disproportionately.
They also stress that the "objective value" system is outdated and it would be better if statistical models in line with EU practices were used to estimate property prices and calculate tax. The lack of a land registry in Greece is a good excuse for the anachronism of the current system and makes the TEE proposal harder to implement.
TEE suggests that the tax exemption for first time buyers be subsidised by the state, otherwise the logistical handling of the VAT might lead to unfair market practices: An owner will prefer to sell to someone who is not tax exempt, so as to collect back the VAT he had paid during construction more easily.
Realtors are working overtime but expect a drop in the market in the first six months of 2006. "The government is deliberately feeding the confusion in the real estate market by holding off the announcement of the new objective prices until the end of the year in order to scare buyers and send as many people as possible to the tax offices in order to increase public revenue," said Yannis Revithis, president of the Real Estate Agents Association of greater Athens.

ATHENS NEWS , 05/08/2005, page: A20
Article code: C13142A201