Every week, Mansion Global poses a tax question to real estate tax attorneys. Here is this week’s question.
Q: Which countries have the highest and lowest taxes on residential real estate sales? Where does the United States rank?
“The U.S. ranks near the top of the list for the tax burden placed on individuals selling their homes,” said Michael A. Gillen, director of the Tax Accounting Group at law firm Duane Morris in Philadelphia.
On the opposite end, New Zealand is one nine countries with a capital gains taxes of 0%.
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With a capital gains tax burden of 28.6%, the U.S. has the sixth-highest rate among 35 countries in the Organization for Economic Cooperation and Development (OECD), said Mr. Gillen, citing 2015 Tax Foundation Organization figures.“Only taxpayers in Denmark (42%), France (34.4%), Finland (33%), Ireland (33%) and Sweden (30%) face higher rates,” he continued.
However, Denmark, France, Finland, the U.K. (28%) and Canada (22.6%) don’t tax sales of primary homes, Mr. Gillen said. Portugal exempts the sale of a principal residence if the proceeds are used to buy another permanent residence in that country or in another European Union member state.
Sales of secondary homes are taxed at 34% in Finland, 28% in the U.K., up to 27% in Canada, 26.5% in Portugal and 19% in France, he said.
“Nine OECD countries fully exempt most capital gains income,” Mr. Gillen said. They include New Zealand, Switzerland, Czech Republic, Slovenia and Turkey.
Although New Zealand doesn’t have a general capital gains tax, “gains made from the sale of residential homes can be subject to income tax in some cases,” said Bevan Miles, partner at Chapman Tripp law firm in Auckland, New Zealand. The country’s top income tax rate for individuals is 33%.
Such cases include when “the property is purchased with the intention of selling it or the property is bought and sold as part of a business that builds homes or buys land and develops it for residential use,” he said.
“We also have a relatively new rule that taxes gains made on the sale of residential property if the sale occurs within two years of acquiring the land, (subject to a couple of exclusions, including when the property is the owner’s main home),” Mr. Miles said.
In the U.S., if a home is sold within a year of purchase, the capital gains would be considered short-term and would be taxed at ordinary income tax rates, up to 39.6%, Mr. Gillen said. The long-term capital gains rate is 20% for taxpayers in the 33%-and-above tax brackets (single taxpayers with 2016 income equal to or more than about $190,000, and taxpayers filing jointly with incomes equal to or exceeding $231,000).
Pending any repeal by the Trump administration and Congress, Mr. Gillen said, the Net Investment Income Tax that arose from the Affordable Care Act boosts short- and long-term capital gains taxes to a maximum of 43.4% and 23.8%, respectively.
However, tax exclusions allow a single seller $250,000 in profits tax free, $500,000 for married couples filing a joint return. The seller(s) must have owned and used the home as their principal residence for at least two of the five years before the sale. These exclusions apply only to primary homes, not to the sales of second or third homes.
Not only can capital gains be taxed on the federal level, in the U.S., they also can be subject to state and local capital gains taxes, Mr. Gillen noted. They range from 0% in states without an income tax, such as Florida, Texas and South Dakota, to 12.3% in California.
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