State Rethinks Apartment Values

The State Construction and Housing Committee is set to approve new methodology for valuing apartments this month. The aim is to bring the amount as calculated by the technical inventory bureau closer to the property's true market value.

While this should be of little consequence for deals of less than $35,000, those selling more expensive apartments can expect increased interest from the tax authorities.

The new methodology no longer would be based solely on the cost of construction, taking into account wear and tear, Nikolai Maslov, first deputy chairman of the State Construction and Housing Committee, said at a news conference last week. It would also take into consideration comfort, floor number, presence of balconies and the state of the doors and entrance hall, he said. Furthermore, the Federal Land-Surveying Service will calculate the value of the land based on its location and the state of its infrastructure.

These amendments to the methodology were made possible when the technical inventory bureau was transferred from the auspices of municipal bodies to the state construction and housing committee.

The bureau surveys all types of buildings Ч both residential and nonresidential. Its evaluation is often entered in sale-purchase agreements to enable the seller to conceal from the Tax Ministry the true amount received.

Maslov did not disagree that the intentions behind the reassessment are entirely financial.

"Our task is to make sure that the taxes paid on identical objects do not differ wildly," he said. "The new methodology doesn't entirely remove the dual-pricing problem, but we're trying to get the evaluation amount as close as possible to the property's market value."

Changing the methodology will not immediately bring a knock on the door from the Tax Ministry, however.

Under the second part of the Tax Code, the nontaxable base for the sale of real estate has been increased to 1 million rubles ($35,000), and if a person has owned the property for more than five years, he or she will not be taxed at all.

A possible danger to the market is that the inventory system could exceed the market value, said Grigory Kulikov, chairman of the board of directors with the Miel real estate company.

This could lead to serious difficulties: If goods are sold for significantly less than the average market value Ч for which the bureau's calculations are applied Ч then this constitutes a violation of the tax legislation. Complications then arise for banks and insurance companies, which must choose either to rely on the bureau's calculations and lose clients or become collaborators. Kulikov's fears are not ungrounded: One and a half years ago in the Moscow suburbs, the official evaluation of land plots exceeded their market value by three to five times.

Estate agents may, however, be able to influence the preparation of the new scheme. At last week's news conference, organized by the Moscow real estate guild, Maslov suggested that specialists with interested organizations get involved in the process.

"Only this must be done quickly," he said. "In three months time, it will be too late."