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. Last Updated: 07/27/2016

Property Tax Revision Proposed

The Finance Ministry has put forward proposals for a major shake-up of the property tax with the aim of making the system more equitable and of reducing speculative investments in the real estate sector.

Plans to peg the annual property tax to the market value of properties, considerably raising yearly payments, and to widen a 13 percent flat-rate tax on the sale of properties were included in a ministry document submitted Feb. 13 to a government commission on budget projects.

The plans, which have long been under consideration by the Finance Ministry, would see the new property tax introduced from Jan. 1, 2009, Interfax reported.

Currently, homeowners pay an annual charge of 0.1 percent to 2 percent of a property's value estimated on the basis of floor space, which vastly underestimates the actual market price.

This means that owners pay nugatory sums each year, sometimes as low as 150 rubles ($5.70), irrespective of the real value of the properties.

In comparison with current figures, the proposed future rate would take into account such factors as the location and condition of the building, giving a figure far closer to the actual market value of the property.

The new taxes would be around 0.05 percent of the property's value over the previous year minus 30 percent.

Put more simply, an average Moscow apartment worth $400,000 to $500,000 could cost up to $2,000 to $2,500 per year in taxes.

According to the proposals, the exact level of the rates would be determined by local administrations and feed into their budgets. But critics argue that this leaves a lot of questions unanswered.

"I understand why they are trying to do this, and maybe the purpose is quite clear and maybe even good, but I don't really understand how they plan to implement the proposals," said Anna Papakhina, a sales director at DeltaRealty.

The suggestion is that the proposed tax would hit the rich. But with many districts being a mixture of rich and poor -- a legacy of Soviet apartment distribution -- the proposals may adversely affect those less well off.

"This will hit people with middle incomes," Papakhina said, arguing that wealthy property owners would not care about a few thousand dollars extra tax per year.

She did suggest, however, that a long-term result of the proposal would be that wealthy investors would look to buy more property abroad.

The second important element of the Finance Ministry's proposal involves moves to reshape the way properties are sold, making the 13 percent tax on income earned from the sale of property more widespread, thereby making owning multiple properties less attractive.

According to the complex taxation system in place at the moment, anyone selling a house that they have owned for more than three years does not have to pay tax on the money from the sale. But if the property has been owned for less than three years, the seller is liable to pay either 1 million rubles ($38,000) or a 13 percent tax on the difference between the cost paid for the property and the amount for which it is sold.

The new legislation would move to simplify current legislation by extending the 13 percent rate to properties that are not the sole property owned by an individual. However, the full tax will be imposed on people owning a single property if they are registered as living at another location.

The move coincides with previous demands from officials heading the national affordable housing project to make speculative investment on property a less attractive option. In September, First Deputy Prime Minister Dmitry Medvedev, who is in charge of the project, argued that higher taxation should be used as a means to decrease the demand for properties from investors.

Real estate experts say investors buying up multiple properties contribute to overall rises in property prices. Yet there is doubt about how likely the proposals are to succeed.

"Substantially raising taxes is possible, but only if we want to hack away at the very roots of all residential construction and move everyone into squats and barracks," said Pavel Krasheninnikov, head of the State Duma's Committee for Legislation, in an interview posted on Sobstvennik real estate's web site.

"To deal with people who own five flats, a progressive tax is expedient," he said. "But we have to understand correctly that it will undoubtedly entail additional administrative efforts and, as a result, the danger of corruption."