At a recent round table meeting of the EKFL (Eesti Kinnisvarafirmade Liidu), an association of Estonian real estate agents, construction companies, developers and other related interests, on 26 October, the question of issues related to tax relief for rental income was raised. The meeting found that, in order to increase transparency and competition in the rental market, measures concerning such tax relief would be necessary.
“Today’s rental market happens to be rather opaque, with activities largely being directed by business considerations from private individual to private individual” said EKFL board member and regular contributor to Tallinn Property Tõnu Toompark.
“This opacity means that rental agreements tend to be either weak or entirely missing” Tõnu goes on, “with uncertainty for both tenant and landlord, and, to be frank, unfair maneuvering regarding taxes”.
As far as taxation goes, there is a grey area in the rental sector which leads to a significant competitive advantage to those landlords who are not paying taxes. The EKFL proposes eliminating this advantage and giving rental housing tax-exempt status, for example for a 10 year period.
“Income tax exemption will reverse the advantage given to the unfair competitive advantage that exists” Tõnu continues. “It will encourage those landlords who want to enter into sound and correct lease agreements and the honest moving of money through bank accounts” Tõnu explains.
Tax incentives can lead to rental offers on new apartments, thus expanding the sector. Currently around 15 per cent of people in Estonia rent their living space; this number can potentially grow towards a level in line with the Western European countries of around 25-35 per cent.
A wider share of the rental market will give all people a better choice of accomodation and facilitate greater mobility of labour. A bigger rental market will also help to keep prices stable and lead to various mini-booms in the rental market.
This proposal for an income tax free rental market is motivated by the situation this autumn, where the supply of rental accomodation is standing at a level of around 30-40 per cent less than this time year ago. This low rate of offers has led to a price ceiling and a certain amount of difficulty in finding accomodation. The EKFL believes that the Estonian economy and real estate market, which the rental market is an integral part of, will be greatly improved when a reasonable level of stability can be forecast.
The EKFL is a network of real estate mediation, development, management and consultants. The EKFL round table is a group of active members who meet on a monthly basis as an effective think tank.
The original press release (in Estonian) can be viewed here.