The Risks of the New Income Tax Law Are Materializing in the Real Estate Market
Since the beginning of the year, individuals have a monthly tax-free income threshold of 500 euros, totaling 6,000 euros on an annual basis. If a person sells real estate in the meantime or earns additional income in other ways, the increased income is also taken into account in the formation of tax-free income.
However, this has created a situation where the market value of real estate purchased long ago has grown considerably by now, and when selling it, there is reluctance to officially declare the entire earned income. The new tax law particularly affects lower-paid citizens, whose income may temporarily spike significantly from a profitable real estate sale, but their actual wage income may become smaller due to the reduction or even loss of tax-free income from wages. For many people who sold real estate in 2018, the year 2019 may bring a sad surprise—not only will income tax not be returned to them from their wages, but they will have to pay considerably more tax to the state.
More enterprising real estate owners have begun offering potential buyers partial payment of the sale price in cash, often offering a partial price reduction as well. However, this trend is not entirely new; it has been practiced especially in smaller regions of Estonia since the early days of the real estate market. Due to the entry into force of the new tax law, however, people's attention to changes in their tax-free income has increased, which has been particularly encouraged by extensive media coverage of the topic.
When concealing earned income, several important factors are often forgotten. There have been relatively few situations where a purchase-sale transaction is concluded but the buyer later refuses to pay the portion requiring cash settlement. However, there have been somewhat more cases, particularly with single-family homes, where hidden defects related to the purchased property are later discovered; in the case of older buildings, these often include damaged structural elements. In such cases, the buyer has the right to demand from the previous owner within three years, for example, remediation of damages, reimbursement of expenses incurred, or a price reduction, but the price may have already been relatively low officially due to the fictitious sales number. It would be rarer for transactions to be rescinded, but of course only with respect to the officially agreed purchase price.
On the other hand, it is often not known that selling one's place of residence is tax-free once every two years. For example, if a person sells their place of residence this March and has not tax-free sold any of their residences in the last two years, then no income tax obligation applies to the sale of the property. It is often assumed that it must be a so-called everyday residence, but nowhere is it specifically stipulated how long a person must have lived in their residence before selling it, either permanently or as their primary residence. If the residential space being sold has been partially used for other purposes, such as renting out, the tax exemption is applied proportionally to the ratio of the area used as a residence and the area used for other purposes.
When settling in cash, it is often forgotten or not wanted to be acknowledged that details of the transaction are known, in addition to the seller, buyer, and notary, by many more people afterwards. Information about transactions is later accessible in terms of both the sale price and other circumstances to, for example, real estate agents, banks, and of course to the tax and customs authority. Real estate sale listings remain accessible even after they are deleted, regardless of whether they are no longer visible on the portal. A large difference between the asking price and the actual sale price is the first possible sign that the sale price does not reflect reality. Real estate appraisers cannot use transactions conducted at prices significantly below market value for conducting appraisals, while alongside this, the perceived growth in tax fraud is steadily increasing.
Source: Arco Vara
