As published in the Official Gazette on 1 January 2013, the rate and method of applying value added tax (KDV in Turkish) on property purchases in Turkey have changed. Previously, KDV tax was applied as 1% on real estate with closed living area under 150sqm and 18% for those with living areas over 150sqm. Effective 1 January 2013, the method of applying KDV tax has changed.
Under the new KDV tax regulations in Turkey, properties with living area under 150sqm may attract as much as 18%, same as those that are over that size. KDV will now be based on assessable value of the land for property sizes under 150sqm and for those over 150sqm, it stays the same at 18%.
What does this mean for properties with living area under 150sqm?
Based on tax assessable value of the land that these properties are situated on, KDV tax rate will be 8% on lower assessable land rates and 18% for those over 1,000TL (approx £350) per sqm. Effectively, this means for more premium / higher land value locations, KDV tax rate may be 18% for smaller property units with living space under 150sqm per built area.
For properties with living area / built area over 150sqm, KDV tax rate is unchanged at 18%.
Does the new KDV tax rule apply to new and old properties alike?
KDV tax is only payable on new build properties sold by developers / builders and not for sale of properties between actual persons. In other words, KDV tax is not payable on resale properties / used properties. KDV tax is payable by developers and builders, which are corporate entities.
The new law applies to building plans acquired after 2012. This is to say for off-plan projects, whose planning licences were acquired prior to 2013, the old KDV tax rule applies and for new licences, the new rule will apply.
What are the implications of new KDV tax system in Turkey for overseas property investors?
Since KDV tax is a direct cost to builders, inevitably most, if not all of this cost, will have to be passed on to the buyers. In other words, prices of new build properties in Turkey are expected to increase in line with KDV increase in 2013. This is a significant increase and will most certainly have an impact on Turkish property market.
“We expect price increases to start hitting the market from first quarter of 2013 onwards. There will most certainly be speculative / opportunistic increases as well as genuine cost based increases. Developers with strong ongoing portfolios and those that are well prepared for the new tax law may delay passing the cost increase onto the market, thus trying to pin down a price advantage, however, this will only be short-medium terms for their next-on projects with 2013 licences will not escape the higher tax band” says Cameron Deggin of Place Overseas, London head-quartered international property agents.
According to Deggin, over 75% of all units purchased in Turkey by overseas property investors are apartments and smaller villas under 150sqm built area. “This means the KDV tax increase will indeed have a significant impact on the overseas buyer market”, Deggin adds.
Istanbul real estate market will undoubtedly be impacted the most as a result of the new tax law due to the fact that majority of properties sold to overseas investors are off plan low-entry level projects, as opposed to holiday homes sold on the Mediterranean and Aegean coasts of Turkey that are predominantly resale or turn-key properties.
Cameron Deggin advises potential Istanbul investors to select larger developers with existing licences for off-plan projects or purchase properties that are already in construction stage / nearing completion properties.