VAT on sale of property

What it means

For a VAT payer the sale of real estate is a supply of goods, but the law largely exempts it. The sale of a building or part of one is exempt once a statutory period has passed since its first occupancy approval or first use, as is the sale of land that is not a building plot.

Sales of new buildings before that period ends and sales of building plots are taxed. For some properties sold between VAT payers the reverse charge applies, so the buyer rather than the seller accounts for the tax.

A payer may opt to tax the sale of an older building that would otherwise be exempt. This makes sense mainly where the buyer is a VAT payer who will deduct the tax, and the seller thereby keeps the deduction on its building costs.

How it works in practice

On a sale we check when the building was approved for occupancy or first used, whether any improvement could have reset the period, and how input VAT was deducted on acquisition. Not only the VAT on the sale depends on this but also the duty to adjust the deducted tax.

Real estate is a capital good with a long adjustment period. If the payer deducted input VAT on purchase or construction and sells the building exempt before that period ends, it must repay part of the deduction. Opting to tax the sale can change that.

Where the sale involves a deposit, the tax point arises on the payment received, as with any other VAT on advance payments. The day of supply need not be the day of entry in the land register; it is often the day the property is handed over to the buyer for use.

What to watch out for

Both the exemption and the option to tax have long-term consequences. A misjudged period since occupancy approval or a forgotten adjustment of the deduction shows up only at an audit, and with expensive properties large sums are at stake, plus interest and penalties.

The purchase contract should state clearly whether the price includes VAT and who bears the risk of a different assessment. Otherwise, in a dispute over whether the sale should have been taxed, the seller pays the tax out of its own pocket, because recovering it from the buyer afterwards may not be possible.