The Chamber of Deputies has finally confirmed the abolition of real estate acquisition tax, which shall cease to exist retroactively as of March. This tax had, in the past, replaced transfer tax, ammounts to four percent and is paid by the buyer. Elena Jakubovič, real estate expert and founder of Y&T Luxury Property, explains in an interview what to expect from this change and how it will be reflected in real estate prices. She believes that one shouldn't unnecessarily hesitate about making a purchase. And she also has a hot tip on what to invest in if you have free money at your disposal.
How do you perceive the abolition of real estate acquisition tax? Do you think this is good news?
Good news? It depends for whom. If you bought a property in October or November 2019, you probably won't feel too excited about it, because it applies to transfers approved by the cadastral office since December 2019. Today's real estate market can be easily compared with fashion boutiques and pubs, which had been left empty during quarantine, and after the lifting of the emergency, crowds of buyers took them by storm. People were trying to take their mind off the situation - buy something nice for themselves and get out of the house. The real estate quarantine will follow the same pattern. Buyers have been waiting to purchase real estate since the end of 2019 and now they'll start buying like crazy.
If the abolition is signed by the president and actually enters into force, what does this really mean for the buyer?
Four percent is a very noticeable difference for more expensive real estate over 20 million crowns, which most people buy as their own buy. Buyers of cheaper flats would also see the change as positive, if they weren't afraid that they could lose their jobs any time. Next to tourism and hospitality, the wave of redundancies can already be felt in administrative, marketing or in HR positions. If banks continue to provide blanket mortgages after COVID-19 programs end, the chances of a positive impact of tax abolition will be greater.
Will the cancellation also affect the owners?
It will mainly complicate the lives of AirBnb apartment owners, who have had quite a demanding period and can no longer wait for the normalization of tourism. I think it is more than obvious that the occupancy by tourists will not increase any time soon. The strategy of renting Airbnb apartments for 3 to 4 months at a reduced/partial rent didn't work either. The chaos caused at the market with both short-term and long-term leases will result in a much larger Airbnb crisis in the autumn of this year.
The trend of short-term leases began 3 to 4 years ago. Over the last two years, the owners of Airbnb flats have been buying more and more real estate, hoping to sell them tax-exempt after 5 years. However, for many flats this deadline has not yet expired. And financial problems are apparent. The question is whether they can afford to wait 10 years for a possible sale under the current circumstances. Airbnb apartment owners who have owned the property for more than 5 years and believed that they were safe and could sell at any time lucked out, too.
The new law stipulates: "The extension (exemption from income tax from 5 to 10 years, ed. note) will apply to cases where the real estate will be acquired since 1 January 2021. In this case, the acquisition of the right of ownership will therefore be decisive (submission of a proposal for registration in the cadastre of real estates), not the approval of this registration." This means that, if the proposal for the registration of ownership rights is submitted in December 2020 and registered only in 2021, for example on the basis of a purchase contract, then the 5-year time test will continue to apply to the purchasing natural person. It looks like in December 2020, there will be more traffic in the real estate cadastre than in all Prague bars after the ban is lifted. (laughter)
What dates should those interested in buying real estate keep an eye on and when will everything enter in force? There are various dates in play, some of them retroactive...
The abolition of the acquisition tax applies, for both citizens and companies, retroactively to transfers approved by the cadastral office from December 2019 and subsequently. That means that the registration in the cadastre of real estates was issued after 1 December 2019 and the tax due was determined by 31 March 2020 at the latest.
Should people wait with the purchase of real estate?
You definitely shouldn't wait if you have a pre-approved loan, if you have selected a property or if you know that, for example due to family circumstances, you'll definitely make the purchase next year. My advice is to buy now. In my opinion, we will see a shortage of real estate on the market as soon as next year.
Delays in proceedings at construction offices, a shortage of labor in the construction industry and the consequent rise in construction work prices have all caused new delays. Developers will be postponing their projects, waiting for more favorable construction conditions. Due to the lack of real estate, prices could rise again. This is a prediction that I repeat in every conversation I have.
How will tax abolition affect mortgages?
Unfortunately, some banks are already refusing to provide loans with property guarantee under the claim of having significantly exhausted their financial resources. Let's not forget that the whole Airbnb panic, the dumping prices on the long-term rental market, all caused a decline in the value of real estate. In both comparative and yield estimation methods.
There are also lower tax deductions that buyers may not like. According to the new law, natural persons (employees and self-employed people, Ed. note) can deduct only CZK 150,000 from the tax base for a mortgage loan, instead of CZK 300,000, as was the case before. This can in fact make a difference of approximately CZK 22,500 per year, or CZK 45,000 in case of Airbnb apartments with a difference of 15% from CZK 300,000).
How will the decision to abolish this tax affect the prices of luxury real estate in the Czech Republic? And how will it affect prices in Prague?
Despite the pandemic, luxury property prices rose by around 4% in 2020. Real estate has once again proven to be a much more stable deposit of money than stocks or gold. I think that by the end of 2020, the growth of prices of more luxurious real estate will be modest, but in 2021 we expect an increase of another 8 to 11%. For 1-bedroom, 2-bedroom apartments, not only in Prague 1, the prices will fall much more significantly. So the sooner the owners start selling, the better.
What properties do you recommend investing in within Y&T Luxury Property now? Do you have a personal tip?
For investors who already have their own money ready, I would definitely recommend investing in smaller apartments, which we are preparing to list. It will allow them to acquire an interesting portfolio in the center of Prague. And once the coronavirus situation is over and the market stabilizes, prices of these apartments can be expected to rise again. So in the long run, it can be a very profitable investment.