Capital gains: A heavy tax on property in Cyprus

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BY GEORGE MOUSKIDES

Because of the crisis in the property sector, there has been an increase in the last few months in the number of calls for a reduction of various taxes that burden property, that in Cyprus are among the highest in Europe.
Apart from the VAT, we have the transfer fees of up to 8%, the mortgage fees that are 1% and the 20% tax on capital gains, i.e. on the profits of a sale of a property. These are some of the taxes that significantly burden the real estate sector.

Decrease capital gains tax
From our past experiences, we discovered that many times customers have paid more than they should have because they were ignorant of their rights.
The cost of property begins from the cost of the purchase if this took place after 1 January 1980 (or the cost that the government assigned for January 1, 1980 if the purchase took place before then). This cost is converted to today’s values based on a ratio prepared by the government that corresponds to inflation. The transfer paid at the time of purchase is also converted and added to the cost. Moreover we add the following:
• The improvements and additions to the property (not the painting, but installation of heating, additional rooms, etc.) on the understanding that supporting documents will be produced.
• The commission of the registered estate agent (that is accompanied by a relevant invoice).
• The interest of the loan that was specifically made for the purchase of the property
These determine the cost of the property. In order to find the profit, that the relevant tax rate (20%) will be applied on, we subtract the cost from the sale price.
In addition, each seller also has a lifetime personal exemption that decrease the profits used for capital gains tax
For a home owner that has lived in his house for the last five years prior to the sale, the seller has a personal exemption of €85.430 (not from the tax but from the profits). For any other property there is a personal exemption of €17.086 that may be used in one or many sales but can not exceed the above amounts during a lifetime.
The level of the particular tax feels steeper in the case of inherited property because the cost there is usually lower.
An example would be the sale of a plot that is inherited vs. sale of the same plot if it was bought, say, 9 years ago.
A plot of land that was in the family for many years was given as a gift by the parents to a child that decided to sell it in December 2008. The plot was valued by the government in 1980 at CYP 2,000 (EUR 3,400). Using the conversion tables for inflation the cost more than tripled to €10,700. If the price to be sold is €200,000 then the taxable profit is €189,300. If it is the first sale that the child conducts then they are eligible for a €17,086 deduction and consequently the taxable amount decreases to €172,214 and the capital gains tax is calculated to be €34,443 (that is to say 20% of €172,214).
If the same plot of land had been bought by the child in December 1999 at €100,000 and €3,300 was paid in transfer fees and a loan of €70,000 was taken out to be paid off in installments and the interest for the nine years amounted to €25,000 then the capital gains tax amounts to €5,152. The sale price is calculated at €200,000, minus the purchase price plus the transfer fees converted for inflation to €132,152, minus the interest of €25,000, minus the personal discount of €17,086. The taxable amount is €25,762 which is multiplied by 20% for the calculation of the tax.
Summarizing, for the same plot, in the case of the donation by the parents a capital gains tax of €34,443 was paid while from the piece of land purchased 9 years ago, €5,152.

George Mouskides is Chairman ‘Association for the Promotion of Property Development’ and Manager of Smart FOX Estate Agency