On November 1, the provisions of Law 2600 “On amendments to the Tax Code of Ukraine regarding the taxation of transactions with real estate objects that will be built in the future” come into force, providing for the introduction of value added tax for developers on a cash basis, and for people – sellers on in the primary market, an income tax of 18% on the difference between the purchase price and the sale price for the first sale of an apartment.
This was announced by Vladimir Sementsov, co-founder and managing partner of INSPI Development.
According to the expert, innovations in taxation in the primary market will not only entail fundamental changes in pricing, but will also affect the number of investors investing in the primary market in order to preserve and increase them.
“Additional costs incurred by the developer due to this law will most likely be borne by buyers, which in the near future may significantly reduce the number of investors and buyers in the primary market. On the other hand, Law 2600 is an attempt by government agencies to reduce manipulation of the tax credit that developers receive during the construction process and an attempt to increase budget revenues. In my opinion, in this case, the VAT will not fulfill its direct function, namely curbing overproduction, and in the case of construction during war and the need to stimulate the economy, the VAT should be completely abolished and the very essence and form of such a tax should be changed. This will, firstly, make any manipulations with VAT reimbursement and optimization impossible, and secondly, it will stimulate the growth of construction,” the specialist noted.
In his opinion, it is highly likely that VAT of 20% will become an additional burden on the price for the buyer-investor.
“Prices on the primary market can increase by at least 20% without taking into account the increase in construction costs,” he believes.
The expert recalled that over the entire construction cycle, the price of m2 increases by an average of 30-35% from the initial price “on the foundation pit”. However, with the introduction of VAT for developers, starting prices may increase by an average of 10-15%.
In other words, developers will immediately “prepare” for future VAT payments by increasing initial prices. Accordingly, the amplitude of price increases from the initial stages of construction to the moment the facility is put into operation may decrease,” Sementsov noted.
The expert said that during the entire construction cycle of residential complexes, developers on average revise prices 7-10 times with increments of increasing the cost of m2 by 3-5% of the previous price of m2. If starting prices rise within 15% due to the introduced VAT, then, in his opinion, the number of “phases” of price growth will be reduced.
In addition to the increase in prices from the developer by the amount of VAT, Law 2600 may lead to a reduction in the number of investment transactions, because this document introduces an income tax for individuals in the amount of 18% on the difference between the purchase price and the sale price for the first sale of an apartment in a year and 5% when further sales. The consequence of this may be the transition of part of the market into the shadows, when the minimum difference in buying and selling will be officially demonstrated, and most of the profit will be processed in cash.
“The introduction of taxation of investment transactions actually equates the primary market with the secondary market. Accordingly, the number of citizens using the primary market as a type of business may significantly decrease, investing in the initial stages of construction with the aim of further selling future apartments closer to completion of construction with a profit of an average of 30% on each apartment. The new tax will lead to a reduction of at least 1/4 of the profits of “resellers”, and in fact, investors who take on part of the construction risks,” the specialist emphasized.
He noted that at the end of 2021, in the primary housing market, the number of investment agreements for the purpose of preserving and increasing citizens’ funds was about 50-55% of their total number. Approximately ⅓ of buyers invested in the purchase of 2 or more apartments with the aim of further selling them until the object was put into operation.
The expert noted that over the past 20 years, one of the features of the Ukrainian primary housing market has been the opportunity to invest in an apartment in the initial stages of construction at a significantly lower price – at least 30% than buying similar housing on the secondary market. In fact, the construction was carried out at the expense of the investor-buyer, and the investor perfectly understood all the related risks, such as untimely commissioning of the house, inadequate quality of housing, or the risk of being a “deceived investor.” In his opinion, the new taxation on the primary market actually eliminates the advantage of an acceptable price for the buyer, and the question of the reliability of protecting his investments in housing that will be built in the future is also quite debatable and does not yet interrupt the motivation to purchase an apartment at a lower price.
“New laws, such as 2518 “On guaranteeing property rights to real estate objects that will be built in the future” and related 2600 “On amendments to the Tax Code of Ukraine regarding the taxation of transactions with real estate objects that will be built in the future”, undoubtedly, they establish new conditions for the work of developers to protect buyers and taxation, but it is too early to talk about their positive effect – how these documents will affect the plans and ability of developers to generally implement new projects, attracting funds from citizens at the construction stage. Changes in taxation mean changes in pricing and profits, so the number of potential investors, at the expense of which the primary market was held, will also be significantly reduced,” the specialist believes.
He emphasized that in the next 3-6 months the situation on the primary housing market will depend, first of all, on the war and the presence of demand. At the same time, developers will make every effort to complete existing residential complexes and fulfill their obligations to purchasing investors.
“In the coming months, developers will try to complete the construction of projects that have already begun, curtailing plans for the construction of new residential complexes. At the same time, one should not expect a rapid increase in demand without attracting affordable and massive mortgages. Without the “injection” of special government programs for lending to both developers and buyers, the primary market will resume rather slowly, concluded Vladimir Sementsov.