Implications of VAT for housing and real estate

The consumption of real estate consists of the flow of services derived from the real estate spread over many years. Theoretically, since the consumption or use of a capital asset takes place gradually during its life cycle, taxation should also occur over time.
However, in most instances, the same result can be achieved by collecting the tax upfront at the time when the asset is purchased because the initial tax represents the net present value of tax collected over time. Either way, if the same person uses an asset during its whole life cycle, the correct amount of tax will be collected and no distortion will occur.
Problems arise with intermediate sales. VAT is irrelevant, of course, for sales between fully taxable persons because the credit system will remove the actual tax burden. When VAT is levied on the initial purchase of long-life consumer products, subsequent sales from one private individual to another do not require any adjustments. The initial VAT will be incorporated in the future sale price of an asset and, as a result, subsequent buyers will each bear an amount of VAT equivalent to the time they had the asset in use.
This is different, however, with intermediate sales of real estate, because, generally, it appreciates in value over time. If tax is only imposed on the initial purchase, no tax would be collected from and be incurred by subsequent owners in respect to the increased value of the property.
This could be resolved by taxing all subsequent sales of houses, including those by private individuals, but registering all private homeowners for incidental sales is neither practical nor politically feasible. Sales of residential real estate are generally mediated by legal professionals, such as attorneys or notaries, involved in title verification and the disbursement of moneys. It makes practical sense to charge these mediators with the withholding of VAT due on a sale of real estate on behalf of the seller.
But it is not that simple, because it would also require a retroactive assessment of input-VAT on the purchase price or maintenance costs, which should be credited against the VAT due on the sale. With many private owners living in a house for many years before selling, this would not be a small task.
Another complication is that most home purchases are predominantly financed by a third party (bank). If home sales are taxed, this would require owners to finance the tax due on purchase (in essence to pay interest over the tax) as well, which would add to the problem of public acceptability and political feasibility.
Therefore, most jurisdictions simply allow the increase in property value to escape taxation and only tax the initial purchase of new construction and cost of maintenance and improvements.
Taxing long-term residential rentals would be logical, because such a use of real estate clearly constitutes a form of consumption. Logically, the rental value of owner-occupied property should also be taxed. Otherwise, ownership would receive preferential treatment over renting.
If owner-occupiers are taxed on the rental value of their property, all homeowners would become taxable persons. As a consequence, they would be eligible to deduct input VAT related to this “self-rent,” including tax paid on its purchase, maintenance and repair. The tax paid on the purchase of the property would become immediately creditable at the time of purchase instead of at the time of subsequent resale, which may raise the question as to why intermediate sales of residential property should be taxed at all.
If both the sale and “self-rent” of residential property are taxed, no tax would actually be collected on the sale of residential property since owner-occupiers would be eligible for an input VAT credit as a result of their obligation to remit tax on the “self-rent.” If the “self-rent” would escape taxation because of the small trader exemption, then only the sales of residential property would lead to actual taxation.
Dr Robert F van Brederode is of counsel to Horwath Mak Ghazali in Oman. He is a tax lawyer, practitioner and scholar with over 30 years of experience in global VAT. He served Crowe Horwath International as the global indirect tax leader, and was the national practice leader of the US member firm. Robert is the author of dozens of academic journal articles and 8 books. He can be reached at

Dr Robert brederode