Originally published at SeznamZprávy.cz on 7 January 2020, at 7:14. Author: Eva Moniova
Taxes are not only a cash pipeline filling up the state’s treasury; they also have the power to regulate the behavior of people and businesses. And the state should use this ability of the taxes, as some experts believe, more actively in the real estate market.
Property prices are unusually high. The worst situation is in the metropolis. According to CenovaMapa.org, the cost of the average square meter in a new building in Prague was CZK 87,611 in the second quarter of last year. According to Seznam, if a Prague citizen with a median income were to save his entire net monthly salary to buy an average three-room apartment in a new building, he would have to be putting off his money for 20 years.
There are several factors to blame, but those interested in acquiring housing continue to be hampered by the state’s tax policy. The buyer must pay four percent of the tax on acquisition of the real estate.
The Czech National Bank is trying to curb real estate price increases, e.g. by restrictive rules for the provision of mortgages. Jiří Rusnok, head of the Central Bank, disagrees with the real estate taxation setup. “We are cooling it down, but on the other hand, someone else is not cooling it down here.” The governor indicated that the government is going against the guardian of the domestic financial market in this respect.
And he is not alone in criticizing these taxes.
“The (real estate – editor’s note) acquisition tax has no justification – moreover, it is the income of the state and not of the local budget. How does the state contribute to selling or buying real estate? What service does it provide in this context? Services that could increase the price of the property for the benefit of the seller are provided by the municipality – and the municipality does not have any income from this tax,” says Lenka Nová, real estate expert from law firm Squire Patton Boggs.
“Is selling of an apartment undesirable, so that its taxation should discourage people from transactions? On the contrary, the state should support such transactions. They will lead to a more efficient use of the housing stock and an increase in the mobility of residents for work,” she added.
“Our real estate tax is very poorly designed,” says Rusnok. “Real estate transfer tax could easily be abolished because it complicates the market. After all, we want the market to be fluid, so that people can buy and sell,” he added.
Transfer or acquisition tax is not a matter of course. In Slovakia, for example, the transfers are not taxed. According to ODS deputy chairman Martin Kupka, it is one of the unnecessary taxes that complicates the tax system and also represents for many people a significant factual and psychological obstacle in the path to new housing. “The buyer has to include this extra amount in the price of the new property, which they will only pay to the state, although they have already taxed all the funds. They pay VAT on the property and they probably borrow money for this unnecessary tax from a bank.”
The Ministry of Finance defends the tax. According to Tomáš Weiss, the spokesman for the ministry, the tax abolition would not solve the excessive demand for real estate on the real estate market. He is right about this – the key problem of the market is the limping supply of real estate.
“The Ministry of Finance does not consider this proposal to be entirely responsible also because the income from the real estate acquisition tax is the exclusive income of the state budget, and so far no proposal for effective replacement of these funds, which amounted to CZK 13.5 billion last year, has yet been submitted. Therefore, such a measure can only be proposed as part of an overall reform of the property tax system,” explains Weiss.
Property tax could be higher.
The CNB’s Governor reminds that we have an extremely low property tax. This is in comparison with property prices and other taxes. The Czech Republic has the lowest real estate taxes from all OECD countries. “Inequalities in the value of property in the form of residential real estate are increasing and become a substantial part of the general social inequalities in our country,” says housing sociologist Martin Lux of the Academy of Sciences of the Czech Republic.
“Actually, we are artificially creating an incentive for those who can afford it to have a lot of real estate and not to let it be on the market because nothing pushes them to do so,” says Rusnok.
According to lawyer Lenka Nová, the combination of very low taxation of property ownership or use and very high taxation of real estate transactions leads to the real estate market not being as dynamic as it could be. And people often own housing that does not meet their current needs. “Many flats are not even used at all, because their owners benefit from only keeping them as such. There are also flats in Prague that do not even have an electricity meter,” said the lawyer.
In the interview with Seznam, Jiri Rusnok talked about how politicians could – e.g. by adjusting the taxes – help the central bank with influencing the development on the real estate market. The aim is not to let the real estate market overheat. “A typical example is Canada. The country responded to such a crisis of extreme growth in the prices by significantly increasing property taxes in certain provinces,” he gave an example.
Sociologist Martin Lux also thinks that tax policy could be far more effective in taming the housing prices and increasing the availability of the housing.
Compared to the acquisition tax, property tax is legitimate and easily justifiable in relation to citizens. The use of real estate creates public costs of transport infrastructure and civic amenities. Good public services then increase not only the comfort of the population, but also the value of their property, as other people also want to live there.
But the municipalities are in a difficult position. They provide public services to residents, but at the same time they only collect real estate tax. As far as income tax is concerned, municipalities do not receive the share of the taxes collected in their municipality – the amount of their share depends on the national tax revenue.
Give the municipalities more money.
“So, first of all, the municipalities have a problem to finance some larger development. At the same time, they are not sufficiently motivated to try to have more inhabitants. If the state does not want to carry out the development itself and wants the municipalities to deal with it, the state must give them a reasonable portion of the money it has collected on taxes in the municipality,” says Nová.
There are different ways to determine the real estate tax. In some countries, it depends, e.g., on the price of a particular apartment. “If it is based on current prices, older people may have difficulty coping with a sudden rise in apartment prices in their neighborhood. If the taxes are based on the purchase price of the current owner, those who own the apartment for a long time pay a much lower tax than those who have just bought it, while benefiting equally from public services,” says Nová.
In the Czech Republic, municipalities have the possibility to change the coefficient assigned to them according to the number of inhabitants, which multiplies the basic tax rate for residential houses and residential units. “The municipality is entitled to increase the assigned statutory coefficient by one category or decrease by one to three categories,” spokesman of the Ministry of Finance said.
Jiří Rusnok does not like the fact that real estate is taxed at the same rate, whether it is for owner’s own housing or “for investment,” which apartment is either empty or being rented. He proposes to leave the base rate for the first real estate, where the owner lives, and to raise it for each additional one.
However, according to representatives of the state and also right-wing politicians, this would mean complications. “It would undoubtedly bring additional unnecessary administration, but it would also probably be a motive for circumventing the law by property owners who would, e.g., transfer the property to someone else,” says ODS deputy chairman Martin Kupka.
“If the owner owns more than one immovable property, it would be very difficult and time consuming for the tax administrator to repeatedly check back in which real estate the taxpayer has its permanent residence,” confirms the spokesman of the Ministry of Finance Tomáš Weiss. One of the possible solutions would be to extend the competencies of the Real Estate Cadastre.
“Increasing the tax on the second and other owned real estate, i.e. on any real estate where the owner does not have the permanent residence, would also bring a wealth of combinations and specifics to which the law would have to react without allowing any exceptions,” Weiss added. For example, situations where more people own the property, either as co-owners or within the joint ownership of the spouses, would have to be addressed.