E. Akelė. Real estate tax: better off being married and free from bank loans

Eglė Akelė

An attempt of the Government to expand taxation of non-commercial real estate did not jump even the first hurdle at the Lithuanian Seimas. Nevertheless, it seems that our MPs are not willing to abandon this idea. Admittedly, they will try to introduce an improved version of the tax, and it’s worth considering what the public may expect from the legislators.

It would be too bold to call this tax universal yet, although the lowered tax-free threshold would increase the number of its taxpayers nearly 10 times and up to 37,000 people. In addition, the lower tax-free threshold would result not only in a much larger number of taxpayers, but also various unprecedented cases raising issues as to how the law should be applied.

The more we look at the group of potential taxpayers the more interesting it becomes.

The first thing that catches the eye is that marriage is definitely an advantage as far as the real estate tax is concerned as one person is subject to the tax-free threshold of 100 thousand euros which automatically doubles for the married couple. However, the threshold applies only to the property acquired after the marriage. Meanwhile, a single person who owns real estate would have to pay this tax already from the threshold of EUR 100,000. Being single or without a status of a spouse also becomes a major disadvantage for single parents and for the unmarried couples who have children as the tax-free threshold of EUR 100,000 would probably be applied for the family home.

It would not be surprising if those who live alone, widows and widowers, and single parents would feel discriminated since married people who have common home would assume a clearly lighter tax burden under the same conditions.

Expansion of the real estate tax would in fact include Vilnius and rapidly developing resort areas in the country. That’s where another aspect comes into focus: if the value of one’s housing rockets due to external factors and growing attractiveness of the location, the owner would end up among those who have to pay the real estate tax. Let’s face it: we do not have such developed and stable market of long-term leases to be able to suggest lightly that the older people or single parents with underage children should just… move to another place.

Those who are buying their first housing financed by a loan from the bank might also feel unfairly taxed. They have already taken on substantial financial liabilities which would continue dozens of years, and all this time their home would be mortgaged to the bank. In addition, they will have to pay the real estate tax.

It was found out “unexpectedly” that a part of real estate, at least in Vilnius, is also registered in the name of minors: when the procedure for waste removal was reformed las year, the children with no income received… bills for garbage collection. It seems that they are also candidates to become full-fledged taxpayers as they are real estate owners with all the ensuing consequences. None the less, here the provisions of the Civil Code come into play stating that the property owned by a minor is managed by the parents. Accordingly, the parents will be obligated to pay the real estate tax on behalf of their child, and the Law on Real Estate Tax does not state any exceptions for underage owners, at least for now.

Another interesting scenario should be mentioned at this point as a single parent raising three or more children or a disabled child is entitled to a higher tax-free threshold, but if the housing of such family is owned by a minor, the property would be taxed from the standard threshold, which is currently EUR 220,000, or EUR 100,000 as proposed by the Government.

The solution to the problem would seem to be simple: re-register the child’s property in the name of the parents. However, under the Civil Code, the parents managing the property of their underage child have no right to acquire, directly or through intermediaries, this property, and it may not be transferred to other persons without the court permission altogether.

Is it worthwhile trying your luck and registering your property in the name of other people so that you don’t have to pay the real estate tax? Only if you enjoy the adrenaline rush and unpredictable risk. First, changing the ownership registration of the property actually transfers the title to the property. Secondly, when property is given as a gift, the donee might have to pay the personal income tax. And third, various property transfers might attract attention of the State Tax Inspectorate which has the right to tax the person disregarding sham transactions if their sole purpose was tax evasion.

According to commentary for media, 2019-10-30