Manuel Olivo Teammobilia

When the Government Decides to Obstruct the Real Estate Market

The application of regulation 50-13, which gave fiscal administration to Law 253-12 of the Tax Reforms, with regards to the real estate Tax (RET), has dealt a blow to the real estate market in the Dominican Republic, a sector which was already facing difficulty and which needed different treatment by the authorities in order to recover.

The Tax Reforms have come at a bad time for the sector which was already struggling thanks to the real estate and financial crises of Europe and the United States.

Following these reforms, Law 253-12 grants a minimum exempt amount of RD$6,752,000 (indexed to 2014) per taxpayer, adjusted for inflation. This exemption is applied to the total value of real estate assets which are subject to the tax. In spite of this modification, the tax authorities attribute fiscal responsibility to only one of the owners, not taking co-owners or spouses into account. What does all this mean for the real estate market?

Most middle class real estate assets are valued above RD$6,752,000. This makes the purchase of a second asset automatically liable to this tax. This directly affects recreational homes, such as a farm, an apartment at the beach, a villa in the mountains, etc. Consequently, this sector of the real estate market is at a standstill. The same applies to those who want to acquire a real estate asset as a retirement plan or simply as a way of receiving extra income through their savings by means of rental income.

If the aim of the RET law was to increase tax revenues from the real estate sector, it was not well thought out. Since the RET discourages the purchase of a second real estate asset, it stops assets from rising in value by creating higher levels of supply, whilst demand slows, as nobody wants to have more than one asset in their name, due to the tax charges.

Even the Director of the Revenue Department acknowledged, on one occasion, that tax revenues collected from payment of this tax are insignificant.

The RET law discourages investment.
By decreasing interest in purchase of a second real estate asset, the construction sector is forced to slow its activities and development. This means fewer jobs for construction workers, engineers, architects; fewer sales in hardware stores and all of the other sectors linked to construction. This results in the opposite effect to increasing tax revenues, transfer of deed taxes and inheritance taxes, at the same time as increasing unemployment.
Whilst the solution may be simple, continuing with the RET law as it stands, is not beneficial for any sector, and does not result in higher revenues for the State.

It would be sufficient to add the exemptions together for each co-owner in the case of shared assets, such as the case of married couples, inheritances and corporations; for example, in the case of a married couple the amounts exempt from tax would be RD$13,504,000.00. This way, more properties would be sold, which would result in higher revenues from transfer of deeds, which equates to 1% of the value of the property. More jobs would be created; this is not just socially and economically more beneficial, it also creates higher tax revenues. People would spend more in commercial establishments, paying more Sales Tax.

Upon adding the exemptions together, a fairer tax would be payable, as only the real estate assets which are truly sumptuary would be taxable, without affecting the dynamics of the economy. Currently, the RET is applied to modest, middle-class properties.

Manuel Olivo
Director Teammobilia
Santo Domingo, Dominican Republic
Tel: 809-541-2323
Email: molivo@teammobilia.com
Web: www.teammobilia.com

 

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