Bahamas Real Estate Market Update, June 2018 – VAT 12%, Property Tax Hike, and more.

“VAT IS Now 12%” But Don’t Worry Real Estate Sales Are Still 10%.

What is Value Added Tax or VAT?  It is a tax on anything and everything, basically a sales tax that applies to all goods and services, imports and exports, the economy from top to bottom.

In this post piece I have copied all the statements recently made in Parliament by Deputy Prime Minister and Minister of Finance for the Bahamas, Honourable KP Turnquest.  The statements have been copied word for word from the communication and they are all the key points that have an impact on real estate, sales, rentals and ownership.  All taxes now fall under one entity – the Department of Inland Revenue.

This will all come into effect as of July 1st, 2018.

“We will..re-energize the reform and modernization exercises that have been launched in respect of the major tax areas, such as Customs and Real Property Tax.

This broad statement encompasses much but states little.  There has been a need identified and an occasional push to modernize the property tax department.  For instance, some years back it finally became possible to pay property tax online.  Despite efforts to clean up and improve, I am still hearing clients complain that the tax office lost record of their payment.  Keep all payment receipts to gov’t.  I hope this provides impetus to improve and prevent another debacle of the 2017 Property Tax Billing.

Blue Economy For small island states such as The Bahamas, although traditional industries and sectors – fisheries, maritime transport and coastal tourism – represent a large portion of economic activity, articulating a strategy around our  blue economy also enables identification and  diversification into many other new and emerging ocean-based activities and sectors, including marine aquaculture, seabed mining, maritime safety and surveillance, marine biotechnology, marine security offshore wind energy, ocean renewable energy and deep-sea oil and gas production.”

This is another far reaching statement with very little specifics.  It does imply that there is opportunity here to start investments into ocean and wind renewable energy industries.  Let’s hope it isn’t just lip service.  The idea of oil and gas mining on the surface has merit, but it negates the need to change the way our world works.  This government does not appear to ascribe to the need to reduce reliance on oil.  All environmental arguments aside, the idea of being energy independent (i.e. having electricity form a source that does not require sending billions of dollars out of the country every year) is not high on this government’s agenda.

“GDP estimate for 2017 at just over $12 billion.

This is an interesting statement and not directly related to real estate.  It does show that the Bahamas economy is doing well and this is good news for business owners and commercial real estate.  In my view though, a large chunk of this increase in Gross Domestic Product is a result of inflation.

“Total mortgage disbursements for new construction and repairs shrank by 3.4 per cent in 2017, on the heels of a 6.7 per cent contraction on 2016.”

This is NOT good news, but NOT unexpected.  The real estate market has been sluggish as we all know and this had lead to a situation where a buyer is presented with much greater value by purchasing an existing home as opposed to building new.  Additionally, tight lending requirements have very heavily limited new construction loans.  It is so bad that one Bahamian bank indicated to me that they were no longer considering new home construction period.  Given the pitfalls and non-existent protections for the consumer building a home here, I don’t really blame them.  Construction company licensing and proper bonding in the country remains a dream at best.

All that aside, here in Abaco construction is not booming.  All the good contractors (and some of the mediocre ones too) are now operating at full steam and many have 2-3 year waiting lists.  This level of building activity hasn’t been seen since 2008.

”…the performance of the large hotel properties in New Providence and Paradise Island where the average occupancy rate declined by 10% to 60.75.  However, despite this development, total room revenue was largely unchanged on the basis of increased room inventory.”

Not directly related to real estate, but interesting to note for those in the tourism sector of the economy.  In essence, last year the number of visitors was down, but the amount of money each visitor spent was up.  This is actually a very good thing.  Lower traffic, higher income per visitor, good stuff.  Read: BAHAMAR.

“In contrast, there are now indications that the performance of the tourism sector rebounded somewhat more buoyantly in the first quarter of 2018 and that this improvement will be sustained.”

I don’t need to comment on this one.

“We are eliminating VAT on residential property insurance.”

This is welcome savings to real estate and home ownership.  Insurance premiums are generally high due to our geological nature of ocean, coastline and hurricanes.  Typical insurance rates are usually around 2% of the full replacement cost.  But beware of “Under Insuring” it’s how they like to get you.

Below are a few bullet points of note to various specific areas of persons.  Most importantly for Abaco is the extension for one more year the Family Island Encouragement Act (Duty free building materials)

  • We are extending for one year both the City of Nassau Revitalization Act and the Family Island Development Encouragement Act;
  • We are extending for 5 years the first-time homeowners Stamp tax exemption;
  • We are extending for 2 years the duty exemption on materials used for the renovation, repair and upgrade of dilapidated buildings;
  • We are eliminating duties on solar kits upon application to the Ministry of Finance.  Presently solar panels are duty free, and this new allowance will mean that vendors or individuals who are bringing in full solar kits can have all related elements brought in duty free.
  • The Real Property Tax Act is being amended to clarify the definition of owner-occupied property;

Updating and clarifying the definition of ‘Owner Occupied’ in relation to annual Real Property Tax has been a long standing point of contention – mainly for foreign home owners who reside in the Bahamas for 3-6 months a year.  The home is generally the only real property they own here but they don’t reside in year round.  The ‘policy’ has historically been that of 9 months residing full time in the home qualifies for the owner occupied tax rate.  Occasionally the ‘policy’ was stretched to 6 months out of the year.  This is has far reaching consequences on the real estate market.  It will raise or lower the cost of ownership where there is a drastic difference between the rates of “Owner Occupied” and the “Other” category.  2% per annum in tax is hefty for a foreign homeowner who utilizes their home only a few months a year.  Getting lumped in the “other” category can also influence whether a home owner chooses to rent their home to vacationers or now.  The vacation rental business drives over three quarters of the Abaco economy and could have a serious negative impact if not handled correctly.

Now the Big one.  As most readers are already aware, the new VAT rate is 12% on all business transactions in the Bahamas.  However real estate sales are now exempt from VAT and only attract Stamp Tax.  Stamp Tax is payable on the change in beneficial ownership in any real property.  This includes changes in ownership among family members.  Going forward the closing costs for real estate transactions are largely unchanged.  Tax on the sale price is noted below.

A wholesale change in the taxation policy for real estate that exempts Real Estate from VAT, replacing the tax on same with a simpler stamp tax formula: a rate of 2.5 per cent stamp taxon transaction values up to $100,000 and a rate of 10 per cent above $100,000.

VAT on the broker fee or commission will go up to 12%, and VAT on the lawyers fee or legal bill is now 12%.  Therefore in essence, these changes to the taxes will effect the final closing costs on real estate sales on the order of a half a percentage point on undeveloped land and approximately 4/10ths of a percentage point on developed properties.  Point is don’t panic if you currently have a real estate sale in the works right now.  Things haven’t changed that much.

One last change which his perhaps quite important for foreign property owners is the increase in Annual Real Property Tax – but only on raw undeveloped land.

The Real Property Tax on foreign-owned vacant land to 2 per cent of value, up from 1.5 percent;

 

I hope my readers find this useful.  Check back for future updates, or sign up for email notice.

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