Economy, Business And Markets

Taxation Could Help Remedy Housing Slump

Levying heavier taxes on expensive residential units can increase government’s tax income. Levying heavier taxes on expensive residential units can increase government’s tax income.

The Institute for Trade Studies and Research, affiliated to the Ministry of Industries, Mining and Trade, has published a report in which the research body recommended property tax as a lesser-used strategy to end the protracted slump in the housing sector.

As the report indicates, paying taxes on profit has been proven to be an effective measure in developed countries to control speculative activities and volatility in the housing market, which has had devastating outcomes for the industrial and mining sector due to its key role in the Iranian economy.

Back in June, the Cabinet approved tax regulations for the housing sector, based on which private builders (both small- and large-scale) need to pay 15-25% of their profit from the sale of a new house as tax.

Construction companies, licensed by the Planning and Budget Organization and housing cooperative companies, will have to pay 25% and 18.75% of their profit in tax.

In addition to that, 5% of the value of residential real-estate deals still need to be paid in tax.

The government-run think tank noted that the construction sector in Iran accounts for over 5% of GDP and 40% of gross fixed capital formation.

The research institute’s report notes that the experience of the past few years has shown that government policies and its interference in the housing sector not only didn’t help the market, but also had the opposite effect of triggering a significant surge in prices.

The recession in Iran’s housing sector started in 2012 when home prices went through significant jumps while foreign exchange rates in the country skyrocketed.

In order to control housing market fluctuations and fix the rates, considering a tax on capital income is necessary and that is why the Iranian government has considered it in the package it has devised to pull the country’s economy out of the lingering recession, the report said.

This type of tax can detect speculative deals and boost potential demand in the market. This is while incentive packages and different interest rates can also support the low- and middle-income groups.

Levying heavier taxes on expensive residential units can increase government’s tax income, which is one of its major goals. The measure would also discourage people from investing in immovable property and instead employ their funds to foster the production and services sectors, which would benefit the public.

Stating that taxes are now only applied to multiple deals, the think tank deems it inadequate, saying that no precedent exists for it worldwide.   

According to the vacant houses’ tax code, such homes do not have to pay any taxes in the first year, but from the second year they must pay half of the due tax and in the third year the full amount and after that the tax rises to 150%.

Not stopping at taxes, the research center proposes other solutions for addressing the housing sector’s woes: scrapping a ban on mortgage lending by lenders other than Bank Maskan–the housing sector’s agent bank– establishing real estate investment trusts (REIT), strengthening the Housing Savings Account–aimed for first-time homebuyers, creating investment banks for the housing market and attracting foreign investment for major building projects.

From these solutions, some are being pursued by the administration. Only last week, the first housing project in Iran (to be financed by an REIT) was inaugurated by Roads Minister Abbas Akhoundi, Bank Maskan’s CEO and other officials.

The project, which has been three years in the making, marks the first housing initiative to tap the capital market as its main source of funding and sparks new hope for the key sector’s redemption in the face of a long-running slump.

It was also announced this week that more than 40,000 Housing Saving Accounts have been opened in the third quarter  of the current fiscal year to Dec. 21 to mark a whopping jump of 57.6% compared with the same period of last year.

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