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Capital gains taxes, Income Taxes

CAPITAL GAINS TAX

The wise investor takes both capital gains and income taxes into account when buying property.

Capital gains taxes - often punitive

Capital gains taxes can be punitive in some European countries. They are high in much of Asia, but are zero in the Middle East (Morocco excepted).

An effective capital gains tax of 22% signifies that, given the assumptions we have made and after all deductions, out of the capital gain of €250,000, 22% is payable in tax, i.e, €55,000.

The 'effective' rate may be different from the usually higher 'headline' rate, because some countries allow the deduction of transaction costs, or deductions for the length of time the property was owned by the seller - the longer the ownership period, the higher the deduction.

Assumptions

In arriving at our effective capital gains tax numbers, we make the following assumptions:

• The property is directly and jointly owned by husband and wife;
• They have owned it for 10 years;
• It is their only source of capital gains in the country
• It has appreciated in value by 100% over the 10 years to sale
• The property was worth US$250,000 or €250,000 at purchase.
• It is not their sole or principal residence.

These assumptions are critical. In many countries a holding period of less than 5 years results in capital gains being taxable. But a longer holding period often results in no capital gains tax being payable.

Note: We do not count taxes as capital gains taxes, if they are actually merely transaction taxes. For instance, the Philippines imposes a 6% 'Capital Gains Tax' on the total purchase price or zonal value, whichever is higher. Despite its name, this is not really a tax on the gain, but a tax on the transaction value. Conversely in some countries there are some taxes which are really Capital Gains Taxes, but are not called by that name. Obviously, these are included in our computation.

Sources:
Our capital gains tax figures are based on our own computations, based on publicly-available data.

INCOME TAX

Rental income tax - painful too

To show how much income tax is payable on rental income, we use the term 'income tax' in a broad sense, as 'any tax levied, proportionately to the amount of income received by the owner for letting property'.

Thus VAT on renting property would be considered a "(broad definition) income tax", but municipal taxes payable by all home-owners whether renting or not, would not be considered 'income tax'.

We adopt this (somewhat unusual) definition because it represents reality. Landlords often have to pay taxes on income which are not called income tax, but which are in fact proportional to their income. All these are counted by us as ‘taxes on income’.

The Global Property Guide's 'standard income tax case'

To make the income tax situation easy to understand, we shy away from boxes with income tax bands (though they are present on Countries | Taxes and Costs). Instead, we use a standard case approach.

Our standard rental income tax assumptions

To arrive at the tax payable, we assume gross rental income is: €/US$1,500/month, or €/US$6,000/month, or €/US$12,000/month (in cross-continent comparisons we assume €/US$1,500/month)

• The property is personally directly owned jointly by husband and wife
• Both owners are foreigners and non-residents
• They have no other local income
• There is no mortgage, i.e., no loan is taken for the purchase

In arriving at the pre-tax profit figure, we calculate, and deduct:

• Depreciation / capital allowances – if available. We assume a typical value for the apartment, based on our valuation research, and depreciate on this basis
• Deduct any other typical costs which a landlord pays, management charges, buildings insurance, realtor agency fees, etc. Either choose a standard percentage deduction (if available) or typical 'actually incurred' costs. If real estate tax is normally payable by the landlord, we deduct that.

The result is also a 'worked example' thus:

The 'effective' income tax rates which we show are in almost all instances different from the 'headline' rates. These effective rates represent what taxes are really payable, after all allowances and deductions. We believe it is more useful, easier, and more realistic to show effective rental income tax rates, instead of concentrating on headline rates.

An example of our effective income tax comparison: Europe (based on an income of €/US$1,500/month)

Corporate Route

Holding rented residential property through a company can, in some countries, reduce tax, or be the only legal way for foreigners to hold residential property. If so, we provide this information.

Sources:
Rental income tax figures are, in every case, based on computations provided by accountants commissioned by us. Their logos appear alongside the data, on the country pages.