We won’t know for sure exactly what kind of property tax the Commission on Taxation has proposed until their report is made public.
But if the recent leaks have any credibility they appear to be favouring a flat rate tax, typically less than €1,000 for the average priced property, based on bands of values into which property owners will then slot their homes.
If, as the leaked report suggest, this is done on a self-assessment basis, it will be the responsibility of the homeowner to make a declaration and send their payment to the Revenue.
However, because we have a ‘progressive’ system of taxation in which those who earn the most, pay the most and this excludes so many from even paying income tax, chances are it will be mainly middle and higher earners who will end up paying the bulk of any new property tax.
The justification for most property-based taxes in other jurisdictions is that the money goes for the provision of services – roads, public lighting, police and fire services, schools, local government, etc.
This local rate or tax, which is often based on market value and square footage is usually reviewed annually, every two or even three years, but it is seldom revised downward. Pensioners and the unemployed are often exempt or enjoy large tax discounts.
Property owners
Most property owners pay up, but some challenge the rate if they see the value of their property falling.
This is either because of a poor delivery of services which lowers the reputation of their community and ultimately their property values or because property prices are falling generally, as they do during a recession.
We, unfortunately, don’t operate a decentralised local authority system and instead depend mostly on central funding to pay for local services.
Since it would be hugely expensive and take too much time to revert to such a system that would justify a genuine property/land tax, it seems disingenuous to call the €600-€800 typical charge as a property tax.
Since no new services or efficiencies will be delivered in exchange for this tax, it should be called what it really is – an annual wealth tax that is probably only going to be levied against certain property owners and their private residences and investment properties.
But how can you assess the value of a property in a still falling market where only a handful of sales are being completed?
If any good comes out of this tax it is that homeowners who have been in denial about the real value of their homes, post bubble, are unlikely to mark down that bubble price.
Instead, they may end up using the price achieved by a neighbour who did happen to sell their house in 2009. The danger is, of course, that this will be a very small, unrepresentative sample, especially in a falling market.
One mortgage broker I know says he thinks house prices will bottom out at 2002-2003 levels and this is the historic price that he’ll be using for his valuation, “if push comes to shove”.
Since there is no market at the moment – and hasn’t been since late 2006 when the last house like mine sold in my Dublin city neighbourhood – I intend to value my house using a long standing formula that professional landlords use to determine good value.
I will take the average rent being paid for our houses and multiply it by a factor of between 12 and 14, i.e. the better the location and the state of the property, the higher the number.
The final figure shows that if someone came along to buy my house tomorrow, they’d be able to recover their initial investment within (in the case of my house, say) about 13 years.
It’s the equivalent of how share investors determine through the price earnings (p/e) ratio how soon they could recoup their investment.
So if you pay €100 for a share and it pays an annual earnings dividend of €10 then the p/e is 10, or 10 years in which to recoup your investment. If it pays a €15 dividend, you get your money back in 6.6 years.
I’ve no idea if my assessment will be acceptable to the Revenue, but it’s acceptable to me.
Why? Because the rent that someone will pay is always a more consistent real time indicator of the market value of a property than the sort of crazy prices that were quoted at the height of a property bubble.
But given the Given the complete lack of an independent national valuation of land and dwellings in this country, there could end up being as many valuation formulas – as there will be householders liable for the tax.
Jill Kerby welcomes reader’s letters. Please write to her via this newspaper or directly at jmkerby@indigo.ie’
