Economy, Domestic Economy

Debate Over Tax on Vacant Houses

Debate Over Tax on Vacant HousesDebate Over Tax on Vacant Houses

More than a year after the parliament decided to levy tax on empty dwellings, the enforcement of the bill is still pending two major steps: approval by the Guardian Council and establishment of an effective mechanism to indentify empty homes, the Financial Tribune’s sister newspaper, Persian daily Donya-e-Eqtesad reported.

When lawmakers passed the bill in February 2014, the Guardian Council, whose responsibility is to ensure the compatibility of the legislations passed by the parliament with the teachings of Islam and the Constitution, rejected the bill due to a number of loopholes.

The parliamentary bill tasked the Iranian National Tax Administration to levy tax on empty dwellings based on half of the tax rate on rental income. However, the Tax Administration announced last week that after the bill was rejected by the Guardian Council, the parliament is yet to come up with amendment to the bill. According to some experts, the bill, if turned into a law, can confront property hoarding and help the housing market overcome the lack of supplies.

The second prerequisite for the implementation of the bill is a strong database that provides for storing, updating, and refreshing information on all the properties and estates based on which every transaction can be tracked.

The system should also be able to account for the exact number of apartments, houses, and land plots every individual owns. Although the initial phases of such system were established during the past few years, as the ministry of road and urban development and the industry ministry developed online systems to track the properties, they still fall short of meeting the taxation requirements. These systems are still unable to recognize how long the dwellings have been vacant based on which the landlords are to be charged with taxes.

With that said, it remains to be seen whether the law can be practically and thoroughly enforced. The system to track the properties can be bypassed as the landlords may refrain from registering their rental contracts, in a bid to avoid taxes on rental income.

  Executive Barriers

Even if the parliament makes the necessary amendment and the Guardian Council approves the bill, there are no sufficient infrastructure to appropriately enforce the law, says deputy head of the Tax Administration, Hossein Vakili. He added that an advanced and large database is required to enforce the law. According to Vakili, once enacted, the ministry of road will be tasked with completing the system within 6 months and share the online system with the Tax Administration.

“There is proper infrastructure in terms of telecommunications and internet but a good management is required to efficiently run the taxation system for vacant dwellings so that the property owners cannot exploit the loopholes and evade the tax on rental incomes,” he added.

  Basis for Taxation

The bill passed by the parliament offers a one-year respite for the vacant homes, while as of the second year; the owners of vacant dwellings are to be charged based on half of the tax rates on rental incomes.

The rate for the third year is supposed to equal the entire rental income tax and it will be one and a half times the rental tax from the fourth year on. Currently the tax on rental income is between 15% and 30% of the so-called ‘regional’ rental rates, which is defined as 40-60% of the market rates for rents.

In practice, the owner of empty homes will be charged 9% of the yearly rent. Based on statistics, the average rent for an apartment in Tehran is around 5% of the apartment’s value, therefore the landlord will be required to annually pay some 0.5% of their property’s value as tax on vacant dwellings. Of course that is if and when the bill is approved by the Guardian Council.