The trade of new apartments has nearly ground to a halt during the spring and fall seasons. In the wake of past years' construction booms, construction companies find themselves with a surplus of recently completed or soon-to-be-finished units, which currently remain vacant due to sluggish demand. As the real estate market faces stagnation, developers are resorting to offering a variety of incentives to spur sales.
On August 22, 2023, Helsingin Sanomat reported that new apartments are now being sold with reduced maintenance fees, with incentives potentially reaching up to 50,000 euros, equating to nearly 10 percent of an apartment's debt-free price in a sample calculation. The article highlighted the risk of circumventing loan regulations concerning extended grace periods for payments, leading to an unclear understanding of the property's actual expenses for the buyer. Just as significant, Isännöintiliitto, the Finnish Real Estate Management Federation, identifies potential tax consequences for the buyers as another substantial risk.
Can a 10 percent incentive of the purchase price be considered negligible?
Isännöintiliitto is keen to emphasize the risk of gift tax consequences that may arise for shareholders when a construction company covers certain costs on their behalf. The risk of gift tax liability increases as the portion of the construction company's payment of the apartment's debt-free price becomes more significant.
According to the current guidance from the Finnish Tax Administration, benefits received in a property transaction, such as exemption from maintenance fees for a year, are tax-free for the recipient if the benefit is deemed negligible in relation to the property's value. However, Isännöintiliitto argues that a 10 percent share of the apartment's debt-free price cannot be considered negligible.
"We are indeed concerned about the buyer's well-being. In the worst case, this could lead to potential tax consequences for the buyer. We want to bring this issue to light as the discussions have not taken the shareholder's perspective into account," stated Mia Koro-Kanerva, the CEO of Isännöintiliitto.
"However, at Isännöintiliitto, we have not reviewed the contents of the agreements. They certainly play a role in assessing the tax implications of the incentives provided by construction companies," Koro-Kanerva clarified.
Price Reductions Benefit Buyers Most
The Helsingin Sanomat article compared various construction company discount and incentive models, revealing a diverse array of approaches. Some reduce the discounted amount from the purchase price, while other models involve construction companies covering all maintenance, capital, and land fees for a year or two. It remains unclear whether construction companies have potentially sought clarification from tax authorities regarding the tax implications of these different models.
"In the view of Isännöintiliitto, the best and safest option for buyers would be to lower the purchase price. This would avoid the risk of reaching a point where the tax authority no longer considers a 10 percent incentive to be negligible, potentially categorizing it as a taxable gift for the buyer. From the buyer's perspective, the situation is unclear and poses a potential risk," Koro-Kanerva concluded.