Last week, the Prime Minister who is also the Minister for Finance in the Bahamas gave a budget communication which had very significant changes to the real estate landscape in the Bahamas.
The changes that have been made are a follow on from the introduction of Value Added Tax in the Bahamas. For the first 6 months of this year, 2015, VAT was not applicable to the sale of real estate itself. Any attorney fees or a broker commission or any other service related to a real estate transaction was “Watable” however the actual sale of the real estate was exempt from the tax.
Beginning July 1st though, real estate transactions will now be subject to Value Added Tax in the amount of 7.5% of the price in addition to a 2.5% flat rate Stamp Tax. Gone is the graduated scale which elicited lower tax rate at the lower price transactions.
Above: Beautiful New Listing Palmetto Beach Villa, Click and check it out.
What are the actual implications?
Real Estate sales under $100,000 are exempt from paying VAT, therefore the sale of a piece of land for $60,000 will not only attract a tax rate of 2.5%, whereas previously that same transaction would have attracted a stamp duty rate of 8%. This is an extremely positive move for the lower price range of real estate. Closing costs for land and homes under $100,000 has been dramatically reduced which will have very positive effects on the market place.
A purchase of a home for $250,000 will attract the same amount of tax now as before. Before the applicable tax was 10% Stamp Duty, NOW it is 2.5% Stamp Duty + 7.5% VAT. In essence the closing costs on a $250,000 purchase will remain the same. And this is effective at all price ranges above $100k up to the multi millions.
Of particular note, is that by converting the tax payable from Stamp Duty to VAT, the government has dramatically lowered the transaction costs for a Bahamas VAT registered business in purchasing or selling real estate. The VAT registered business can now credit their real estate purchase tax liability back. In essence for VAT registrants, the closing costs on real estate have changed to 2.5% stamp duty instead of the 10% is was previously. (+Attorney fee +Broker Fee).
There was also mention of a pending change to the Bahamas Real Property Tax Act whereby a new ‘category’ will be created for ‘Residential’. At the moment there are 2 categories for property tax in the Bahamas, ‘Owner-Occupied’ and ‘Non Owner-Occupied’. Essentially if you live in your home you see a drastically lower tax rate, and everything else including commercial, retail, industrial, residential rental properties, even a home you own but don’t rent and don’t live in could attract the higher rate of 1.5% of the value.
With the creation of a Residential tax category, all Residential properties whether lived in or rented would be within this category. This is a substantial concession for owners of duplex and triplex residences who would have had to pay a relatively hefty property tax on the rental apartments. The ‘Residential’ category will likely incur the same rate as the current ‘owner-occupied’ rate of 0.75% however the legislation has not yet been tabled or approved, but the communication indicated the change would occur prior to the October bills going out this year.
These two adjustments which may seem minor on the surface will have significant impacts on the ownership of real estate in the Bahamas. In essence improving the attractiveness and lowering the soft cost of acquiring, holding and selling real estate here.
Also of note was the elimination of import duty on bicycles, so everyone go out and buy a bike, get out and see the Bahamas on 2 wheels.
And a reduction of duty on ‘Stuffed Pasta’??? Someone has a food fetish there hey?
Lastly, another important point was the extension of the “Family Island Encouragement Act” whereby home construction and repair is permitted to bring in building materials duty free. The spirit of the legislation is to spur economic growth and create short and long term employment through the development and construction of homes. The Act is supposed to be extended to Eleuthera and Abaco which previously were excluded. I welcome feedback from someone who access the Act benefits in Abaco.