{"id":4573,"date":"2024-11-08T13:05:00","date_gmt":"2024-11-08T11:05:00","guid":{"rendered":"https:\/\/sinta.lv\/?p=4573"},"modified":"2024-12-04T19:22:20","modified_gmt":"2024-12-04T17:22:20","slug":"new-income-tax-rate-on-capital-gains","status":"publish","type":"post","link":"https:\/\/sinta.lv\/index.php\/en\/2024\/11\/08\/new-income-tax-rate-on-capital-gains\/","title":{"rendered":"Income Tax is changing. Sell now?"},"content":{"rendered":"\t\t
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If you <\/span>plan<\/span> to sell your apartment, land or private house, then you already know that <\/span>as of<\/span> January 1, the IIN (personal income tax, PIT) rate is expected to change, including <\/span>on<\/span> capital gains. New rates will apply to transactions initiated after January 1, <\/span>and<\/span> in case of property sale<\/span> determining factor is a date when sales or pre-sales <\/span>contract <\/span>becomes effective or a date when actual payment or downpayment lands into seller\u2019s account.<\/span><\/p>

The new tax rate will be higher than the current one, and it will have an element of progressivity, too. At a first glance it appears you should do everyting possible to sell your property this year. Why don\u2019t we take a look if that is so with real examples? Let\u00b4s take 4 sample properties from various price categories and calculate the tax payable in different sales scenarios for each of them to try determine which scenario brings most money into the seller’s account after tax is paid.<\/span><\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t

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How is the tax calculated<\/h2>\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t
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Capital gains are the difference between the sale price and the acquisition value, which is either the purchase price or the value as stated in the inheritance or donation documents. If the property was acquired before 2001 and no documents proving its acquisition value have been preserved, or if it was obtained by restoring property rights, etc., then the current cadastral value of the property with or without adjustment will be used for capital gains calculation.<\/span><\/p>

Taxes and fees, currently and also in 2025, will be calculated using the cadastral value determined in years 2012-2013. It is important to note this, since all real estate properties in Latvia have several and different cadastral values which are used for different purposes.<\/p>

Currently, the IIN rate for capital gains is 20%, but from January 1, a rate 25.5% is expected with extra 3% on part above \u20ac200,000. Saeima is expected to pass the law beginning of December. Till then changes may be introduced to the version approved by the government.<\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t

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Should I call a realtor now?<\/h2>\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t
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It should be noted that when a real estate property is sold by a private individual, in many if not in most of the cases IIN from capital gains is not applicable. Detailed description of these cases can be found in the methodological materials of the VID here<\/span><\/a> (in Latvian)<\/span> o<\/span><\/span><\/span>r otherwise ask <\/span><\/span><\/span>your realtor.<\/p>\n

If any of those cases applies to you, there is probably no reason to worry or rush with the sale.<\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t

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What and how will be calculated<\/h2>\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t
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In all examples, we will deliberately examine cases where the cadastral value is used for the calculation of capital gains. By this approach we provide that capital gains, and consequently, the tax payable, will the highest possible. In other words, we will be looking into the worst case scenario. This would be the case, for example, where the property was purchased in the 90s and the documents confirming the transaction are not available. If the property was acquired relatively recently, it is highly likely that the acquisition value is significantly higher than the cadastral value, and the tax will be lower than in our examples.<\/p>

For the IIN (the tax amount) calculation we will use a simplified formula ND = (PC-V) x NL<\/strong>, where:
– ND<\/strong> \u00a0 is amount of tax payable
– PC<\/strong> \u00a0 is a property sale price
– IV<\/strong>\u00a0\u00a0 is a property acquisition value (purchase price, gift or inheritance value); since in our example the acquisition value cannot be proved, the cadastral value will be used, adjusted by change of the consumer price index during the last 10 years; at the moment it is 1.449
– NL<\/strong>\u00a0\u00a0 is IIN rate (20% till end of this year; from January 1, it is expected to be 25.5%, plus, extra 3% from amount above \u20ac200,000)<\/p>

Capital gains calculations also consider additional costs related to property acquisition and investments in property development, as long as they can be proved. We will ignore those, since they remain constant across all scenarios and do not serve towards the purpose of comparison.<\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t

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Three different scenarios<\/h2>\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t
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In the first scenario, the property sale transaction, i.e. the contract, can be concluded this year, selling the property for its normal market value and paying tax at the current rate of 20%.<\/p>

In the second scenario, the property is sold after January 1 at normal market value albeit with the new tax rate. This will highlight the impact of different tax rates on the seller\u2019s account balance when the transaction is completed and tax paid.<\/p>

So, what is the third scenario about? Because things are never that simple. It is quite certain that all concerned sellers will try to push the deal this year to take advantage of the lower tax rate. This will inevitably lead to market oversaturation during the last months of the year with inevitable pressure on market prices and it is likely that seller will be forced to sell his property below its normal market value. This is the situation we will attempt to imitate in the third scenario.<\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t

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Now, to the calculations<\/h2>\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t
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Example 1<\/h2>\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t
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The normal market value of the property is \u20ac30,000 and the cadastral value is \u20ac15,000. It could be a 40 sqm soviet time apartment in Riga that has not been renovated for a long time.<\/p>

Scenario 1:<\/strong> sold this year at a price corresponding to the normal value: IIN tax is \u20ac3,930 (see the formula above); and \u20ac26,070<\/b> is seller\u2019s account balance after tax
Scenario 2:<\/strong> sold after January 1: IIN tax is \u20ac5,010; seller\u2019s account balance \u20ac24,990
<\/b>Scenario 3:<\/strong> sold this year, but at a reduced price \u20ac28,500: tax is \u20ac3,630; account balance \u20ac24,870<\/b><\/p>

Apparently, seller may rather remain calm and go to the market when prices normalize next year because even with the new tax rate, it may turn out as the most favourable option for a seller. However, if seller is lucky or skilled enough to manage sell a property still this year at the normal price or close to it, that\u2019s even better.<\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t

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Example 2<\/h2>\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t
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Normal market value \u20ac65,000 and cadastral value \u20ac25,000. It could be a soviet time apartment of around 60 sqm in good condition in Riga.<\/p>

Scenario 1:<\/strong> tax is \u20ac9,549; account balance \u20ac55,451
<\/b>Scenario 2:<\/strong> tax is \u20ac12,175; account balance \u20ac52,825
<\/b>Scenario 3:<\/strong> at a price of \u20ac63,000: tax is \u20ac9,149; account balance \u20ac53,851<\/b><\/p>

At this price level, the seller may be better off by selling this year even with a lowered price. However, the difference between the scenarios is not that significant, so it should carefully evaluated how far seller can discount his property to achieve a winning result.<\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t

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Example 3<\/h2>\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t
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Normal market value \u20ac140,000 and cadastral value \u20ac45,000. It could be an 80-90 sqm advanced type soviet time apartment in good condition in Riga or a relatively recently built apartment on the secondary market in Riga.<\/p>

Scenario 1:<\/strong> tax is \u20ac21,789; account balance \u20ac118,211
<\/b>Scenario 2:<\/strong> tax is \u20ac27,781; account balance \u20ac112,219
<\/b>Scenario 3:<\/strong> at a price of \u20ac136,000: tax is \u20ac20,989; account balance \u20ac115,011<\/b><\/p>

Clearly, worth trying to sell this year, because even with a significant price reduction, the benefit from the lower tax rate is significant.<\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t

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Example 4<\/h2>\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t
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Normal market value \u20ac280,000 and cadastral value \u20ac55,000. It could be a well-maintained medium-sized private house near Riga.<\/p>

Scenario 1:<\/strong> tax is \u20ac48,409; account balance \u20ac231,591
<\/b>Scenario 2:<\/strong> tax is \u20ac62,982 (extra 3% applied); account balance \u20ac217,018
<\/b>Scenario 3:<\/strong> at a price of \u20ac270,000: tax is \u20ac46,409; account balance \u20ac223,591<\/b><\/p>

Due to the fact that highest price segments are subject to a progressive tax rate after January 1, the impact to seller\u2019s account balance may be several thousands of euros. Quite obviously, it is worth to put in extra effort to conclude the sale within this year even if that requires substantial price discount.<\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t

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Conclusion<\/h2>\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t
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These were some illustrative examples of tax impact in case of the highest possible capital gains in different price segments. In reality, each case is unique and options can vary greatly.<\/p>

We encourage every seller to follow the news and carefully assess your situation and choose the most appropriate plan of action yielding the highest return. If in doubt though, reach out for a consultation from VID and from a real estate professional. Our company as well as many other reputable companies in the industry offer the first consultation free of charge. Good luck with the sale!<\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t

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Disclaimer:\u00a0 Information provided in this text is not a tax advice. All the calculations are indicative under specific conditions based on the information availabe in November 2024. The sole purpose of the calculations is to illustrate the autho<\/span>r\u2019s opinion of the potential real estate market impact from the expected private income tax rate changes.<\/span><\/em><\/p>

\u00a0<\/span><\/em><\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<\/div>\n\t\t","protected":false},"excerpt":{"rendered":"

If you plan to sell your apartment, land or private house, then you already know that as of January 1, the IIN (personal income tax, PIT) rate is expected to change, including on capital gains. New rates will apply to transactions initiated after January 1, and in case of property sale determining factor is a […]<\/p>\n","protected":false},"author":1,"featured_media":4593,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"site-sidebar-layout":"default","site-content-layout":"","ast-site-content-layout":"default","site-content-style":"default","site-sidebar-style":"default","ast-global-header-display":"","ast-banner-title-visibility":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"","ast-breadcrumbs-content":"","ast-featured-img":"","footer-sml-layout":"","ast-disable-related-posts":"","theme-transparent-header-meta":"","adv-header-id-meta":"","stick-header-meta":"","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":"","astra-migrate-meta-layouts":"set","ast-page-background-enabled":"default","ast-page-background-meta":{"desktop":{"background-color":"var(--ast-global-color-4)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"ast-content-background-meta":{"desktop":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"footnotes":""},"categories":[18],"tags":[],"class_list":["post-4573","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-uncategorized-en"],"_links":{"self":[{"href":"https:\/\/sinta.lv\/index.php\/wp-json\/wp\/v2\/posts\/4573","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/sinta.lv\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/sinta.lv\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/sinta.lv\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/sinta.lv\/index.php\/wp-json\/wp\/v2\/comments?post=4573"}],"version-history":[{"count":0,"href":"https:\/\/sinta.lv\/index.php\/wp-json\/wp\/v2\/posts\/4573\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/sinta.lv\/index.php\/wp-json\/wp\/v2\/media\/4593"}],"wp:attachment":[{"href":"https:\/\/sinta.lv\/index.php\/wp-json\/wp\/v2\/media?parent=4573"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/sinta.lv\/index.php\/wp-json\/wp\/v2\/categories?post=4573"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/sinta.lv\/index.php\/wp-json\/wp\/v2\/tags?post=4573"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}