The draft tax bill of the Tax Amendment Act 2015/2016 provides for new rules regarding the income taxation of taxpayers owning real estate, including inter alia, the introduction of a higher tax bracket of 30% for capital gains from the sale of real estate held by individuals, as well as the extension of depreciation periods for acquisitions costs and extraordinary expenses for buildings. The amendments are expected to take legal effect beginning 1 January 2016, with certain retroactive effects being provided for.
Increased tax bracket for gains from the sale of real estate
Under current law, gains from the disposition of real estate are generally subject to a flat income tax rate of 25%. Such tax rate shall now be increased to 30% for gains realized by individuals. Individuals will still have the option to apply for taxation at progressive income tax rates (now up to 55%). If such option is exercised, the new rules will allow for the deduction of expenses related to the disposition of real estate. For corporations the tax rate will remain at 25%.
The envisaged increase of the tax rate will also affect the maximum amount of losses suffered from the sale of real estate which is available for an offset against other income. A loss from the sale of privately held real estate, to which the flat tax rate of 30% will apply, will have to be reduced to 60%, allocated over a period of 15 years and may only be offset with non-business rental income. Alternatively, the taxpayer may opt in his tax return to offset such loss immediately in the current year with rental income.
A loss from the sale of real estate held as a business asset, and to which the flat tax rate of 30% applies, may be offset by up to 60% against other income of the taxpayer in the same year.
Extension of depreciation periods for acquisition costs and extraordinary expenses
Currently, acquisition costs for buildings are depreciable over a period ranging from 33.33 (3% depreciation rate) to 50 years (2% depreciation rate). Under the new rules, acquisition costs for buildings will generally be depreciable over a uniform depreciation period of 40 years (2.5% depreciation rate). Only buildings being part of a taxpayer's business assets which are used for dwelling purposes will depreciate at a rate of 1.5%.
In addition, under current law, certain extraordinary expenses related to buildings have to be allocated over a period of 10 years. The draft tax bill now provides for an obligatory extension of such allocation over a period of 15 years. Although such extension takes legal effect as of 1 January 2016, any ongoing allocations/depreciations of acquisition costs and extraordinary expenses will have to be adjusted according to the new allocation period of 15 years.
Lastly, the draft tax bill introduces a presumption regarding the allocation of acquisition costs of developed real estate. 60% of the acquisition costs will be allocated to (depreciable) building(s) and 40% to (non-depreciable) land (40%) (currently, there is an 80/20% ratio). Again, any ongoing depreciation of buildings will have to be adjusted accordingly in order to reflect the new allocation of acquisition costs.
As a result of these changes, the taxable basis of real estate focused activities will generally rise.