This is How Much Tax You Pay on $1M Property

As government bonds are yielding close to record lows and global stock markets have kept investors on edge for most of the year, investing in real estate has gained popularity.

The largest sovereign wealth fund in the world, Norway’s $860 billion oil fund, announced earlier this month it might invest more than $4 billion in property worldwide this year, breaking last year’s record.

But post financial crisis, after several years of strong growth in both residential and commercial property, affordability for some investors has become a limiting factor.

As growth has slowed, investors have become more aware of what it actually costs to buy, hold and sell a property, with tax costs a key factor for investors when choosing where in the world to invest in real estate.

Data compiled by luxury global property agent Knight Frank and advisory group EY has tallied the cost of taxation on a $1 million and $10 million property across 15 cities - assuming that a non-resident investor has a sum of money to invest in a number of cities around the world and that the property is owned for a five-year period.

When analyzing those cities where property costs are highest, Knight Frank and EY have determined Paris (with taxes making up 15.3 percent of a property’s cost ), Berlin (at 13.3 percent) and Geneva (at 12.6 percent) to impact foreign investors with the highest property costs at the $1 million mark.

Considering the tax costs across the 15 cities, it is a different story. Taxation is highest in Sao Paulo, where in spite of getting more property for your money both at the $1 million and $10 million level, the cost to investors would be around 31.5 percent of the total cost of investing in the fifth year of investing. It is followed by Hong Kong.

“When purchasing property as an investment, tax is not necessarily the first concern but it is important because it is often the after-tax return that measures the success of the investment. Our research shows that the tax burden across the cities in this report varies considerably both in amount and extent,” said private client tax services Partner at EY, Carolyn Steppler.

“From 3.5 percent or 3.6 percent of the property price in year five in Monaco and Dubai respectively, to over 30 percent in Sao Paolo. However a common thread across all these countries, which shows no sign of slowing, is a continuing focus on property as a source of taxation,” Steppler added.

Here we look at how some of the world’s major cities compare in terms of tax costs:

Hong Kong tax costs including the stamp duty, property tax on rental income and profits tax on the disposal gains, equate to approximately 22.4 percent-23.2 percent of the property price in year five, making tax costs on buying a luxury property one of the most expensive in the world, according to the report. The most significant part of the tax cost is the 15 percent Buyer’s Stamp Duty (BSD), which is only chargeable for non-Hong Kong permanent residents and corporate buyers.

U.S. tax costs for New York property equate to 15.5 percent (for $1 million property) and 19.2 percent (for $10 million property) of the property price in year five. Non-U.S. individuals who invest in New York City rental properties could consider electing to be treated as engaged in a U.S. trade or business for income tax purposes, which allows the individual to deduct expenses incurred in producing rental income in determining taxable income.

“As the globalisation of wealth continues apace New York’s luxury market, along with London’s, remains at the top of most HNWI’s wish lists but with an upturn in the local economy and a strong US dollar, US demand is again rivalling foreign demand,” said global head of research at Knight Frank, Liam Bailey.

U.K. tax costs equate to approximately 9.7 percent (for the $1m property) and 20.7 percent (for the $10 million property) of the assumed year five price.

“The net impact of recent tax reforms in London has been to slow price growth and reduce transaction volumes over the past 12 months – that said tax has never been the primary driver for purchase in the city. The wider offered by London’s unique global business cluster, its world leading education provision, and its lifestyle offer should ensure that demand is only marginally impacted by recent reforms, ” Bailey said.

Tax costs in Monaco are comparatively low and equate to approximately 3.5 percent of the property price in year five. Non-residents benefit from a low tax regime when they invest in Monaco property since taxes are due only on acquisition (no taxation of the rental income and capital gains). Although its low tax status is a key motivation for those relocating, the lifestyle on offer in Monaco is also an important driver, according to the report.

Australian tax costs equate to approximately 18 percent (for $1 million property) and 26 percent (for $10 million property) of the property price in year five. The greatest taxation cost in Australia is in relation to capital gains tax, which is generally imposed on the net gain made by the vendor/seller on disposal of property. Non-residents of Australia are currently limited to purchasing new or off-the-plan property.

“Prime prices in Sydney increased by 13.7 percent in the year to September 2015, it’s strongest annual increase since the financial crisis,” Bailey added.