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USA Cheap For Residential Sales But Income on Commercial Rental Property Heavily Taxed

USA Cheap For Residential Sales But Income on Commercial Rental Property Heavily Taxed
16 Aug 2011

Taxand T3 (Total Tax Take) research, conducted by Taxand, the world's largest independent organisation of tax advisors to multinational businesses, has shown that the USA provides a relatively attractive tax take for corporate real estate investors looking to sell developed homes or apartments in comparison with other jurisdictions. The USA occupies the cheaper end of the rankings, boasting a tax take of just 13.87% for home sales and 12.11% for the sale of apartments.

One significant reason for the lower tax take for US corporate investors selling property in the residential sector is that US tax law does not provide for VAT. This is compounded by the fact that the US only taxes net gains from sales (sales proceeds reduced by a taxpayer's investment) as opposed to gross proceeds.

At the other end of the scale, the T3 research reveals that the US is the second most expensive country for corporates investing in commercial property, with 41.17% of net taxable income swallowed by tax, although this figure is a reduction from the 43.33% rate that Taxand's 2009 T3 research revealed.

The Taxand T3 research shows that the USA is also the second most expensive country for corporate healthcare property investments such as hospitals, care homes or medical offices with the tax man taking 41.17% of net taxable operating income in this property sector. The USA sits behind Spain which tops the rankings as the most expensive jurisdiction for healthcare property with a rate of 41.59%.

The USA also has a high tax take on residential real estate rentals at 39% of net taxable income and sits in the top five countries rated as the most expensive for buy-to-let investors. The most significant difference between the taxation of residential and commercial rental real estate to a corporate investor in the US is differing rates of depreciation/cost recovery on these types of assets.

Factors contributing towards the USA's high rankings for commercial rent, healthcare property investment and buy to let investment include the high rate of federal income tax on net rental income (up to 35%), additional state income taxes on net rental income (~6.65% on average), annual real estate property taxes (~1% of property value on average) and non-recoverable sales taxes on construction materials (~8% of cost of materials on average).
The Taxand T3 research into the real estate market was conducted across 23 countries across the globe.

Keith O'Donnell, Global Head of Real Estate, at Taxand said:
"The rankings also draw some interesting conclusions regarding the appeal of particular locations for investment in commercial real estate with a number of developed economies such as the US, Canada and the UK remaining outside the cheap bracket and less popular choices such as Cyprus, Finland and Luxembourg emerging as attractive alternatives from a tax perspective."

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Taxand T3 research methodology
Taxand has updated and expanded its T3 data.

To arrive at the figures, Taxand has taken into account VAT (or its local equivalent), corporate income tax, and property taxes based on 2010 rates. The property taxes were usually subject to various country-specific assumptions and modifications as they often differ on municipality basis or sometime just location basis. Those were reviewed by the coordinating Taxand team to assure comparability. Administrative fees, notary fees, court fees were excluded as having a relatively low impact on the overall tax take.

To ensure comparability of the results, certain data has been fixed such as size of the building, investment costs, and 100 percent non-interest bearing equity financing.

With all of that built into the model, Taxanders adopted it to the local law to ensure comparability.

Taxand T3 is a global research tool. Initial findings have focused on reviewing major jurisdictions. Other interesting findings include the high tax take on property in the healthcare sector, commercial property sales and income. The research will be carried out on an annual basis to establish year on year trends.

Your Taxand contact for further queries is:
Abigail Tarren, Global Operations Director
T. +44 (0)207715 5243

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