“The real estate market is facing unprecedented challenges. Ensuring housing taxes are fair and effective is more important than ever,” explains Pascal Saint-Amans, director of the tax branch of the OECD (Organization for Economic Co-operation and Development). It is with this introductory remark that the report on real estate taxation published on July 21 by this institution begins.
Growing challenges
The ever-increasing share of main residences in household wealth, 50% on average in the OECD, makes it a cardinal element of citizens’ lives.
But prices, still on the rise, exacerbate inequalities in housing: the wealthiest and oldest hold a share “disproportionate” housing, to the detriment of the youngest and most modest. “While housing taxes already play an important role in OECD countries, there is room to improve their efficiency, fairness and potential revenue,” points out the report.
Tax capital gains, not transactions
Also, if they are a reliable source of revenue for administrations because of their base, taxes on property such as property tax “rely on outdated cadastral values, which significantly weakens their revenue mobilization potential”. The report points out that these taxes have not kept pace with rising property prices since the 1960s. The OECD suggests that these taxes “rely on market values”which implies “regularly updated cadastral values”.
Conversely, the organization suggests reducing taxes on real estate transactions to facilitate market access, as well as residential and professional mobility.
The OECD points out that “the majority of countries fully exempt capital gains realized on the sale of the principal residence” and economists note that “uncapped exemptions provide significantly greater benefits to wealthier households”. They therefore propose taxing, above a certain threshold, capital gains on main residences and systematically taxing those on secondary residences.
Rebound effect
Another measure criticized by the OECD, the possibility for owners who have taken out a loan to acquire their main residence, to deduct interest from their tax base. This measure – present in 26 of the member countries – is supposed to facilitate access to property but it is qualified as “regressive and ineffective” : the measure tends, on the contrary, to make people buy more expensive houses and, ultimately, drives prices up.
Finally, the institution calls for “better targeting tax incentives for energy renovation”.