Tax and Turkish real estate

Income tax liability in Turkey depends on residency.  If you are regarded as Turkish resident, then you will be liable to pay income tax in Turkey.  If you are not Turkish resident, then you are not liable to pay taxes in Turkey except for tax on earnings derived in Turkey such as real estate taxes (see below).

Are foreign nationals liable to INCOME tax in Turkey?

This will again depend on residency status of a foreign national.  Therefore the following rules apply

1. If a foreign national is regarded as resident in Turkey for tax purposes, then he/she will have to pay tax in Turkey.   Foreign nationals will be deemed Turkish resident for tax purposes if they have acquired legal Turkish residency or if they live in Turkey more than six months in any one tax year.  This is known as the ‘six-months’ rule for establishing residency for tax purposes.  If a foreign national is deemed as resident in Turkey, then he/she will be required to pay taxes on his/her income no matter where that income arises.  In other words, a foreign national, who is resident in Turkey for tax purposes is required to pay tax on his/her global income.
    
2. If a foreign national is not regarded as Turkish resident for tax purposes, then he/she will only pay tax in Turkey on income that is earned through business operations in Turkey or real estate ownership in Turkey.  This is called limited tax-payer status.   Residents, who stay in Turkey more than six months purely in order to undertake an official duty or appointment, such as diplomats and the like, are also regarded as limited tax-payers.   Most Turkish holiday home property owners, who are not residents in Turkey fall into this category.  This means they are only liable to tax on income derived from renting out their Turkish holiday homes and/or investments.       

Turkish real estate taxes (payable by all irrespective of residency) are very low when compared to other European countries.  If you are considering purchasing property investments in Turkey, you’ll want to understand how taxes are levied in Turkey.  You’ll also want to compare Turkish property taxes with other overseas real estate markets.  Let’s look at the property tax system in Turkey and some other European nations.

Taxes on real estate in Turkey can be divided into three clear sectors. 

1. First, there is the tax payable (stamp duty) when a real property changes ownership.  The tax is payable upon registration of title deeds.  This tax is equivalent to 4.4% of the ‘declared amount’ of the real estate and is paid by both parties to the transaction in equal amounts. However, and we must underline this, stamp duty is usually part of the purchase negotiations and the sellers tend to push the entire liability over to the buyers.  Therefore, in reality 4.4% over the declared amount of the property being sold is paid by the buyer.
   
   Note: Declared amount of the property is not the same as the purchase value. Sellers and buyers almost always under-declare their property values so as to lessen the blow of stamp duty and capital gains tax where applicable.  Turkish tax authorities are more than aware of this and thus they test for ‘reasonable declarations’.   50-60% of purchase value is nowadays accepted as reasonable by Turkish Revenue and thus not challenged.  However, if you are purchasing real estate in Turkey and the seller insists on a very low declaration (say less than 30%), then seek legal advice before agreeing to it for unreasonably low declarations may be challenged by the Turkish tax authorities.
    
2.  There is also an annual property tax payable in Turkey.  This is similar to council taxes paid in the UK and US, however, much less in monetary amounts.  This tax is typically between 0.6% and 1% of property value.   This is to say if you purchase a property in Turkey for Euro 200,000 and value is assessed as say Euro 120,000, then maximum you will pay in a year will be around Euro 1,000.
    
3. Turkey will also tax income from real estate, including income (profit) that a foreign real estate investor gains from the sale of real estate and from renting out his/her property in Turkey.  Tax rates range from 15% to 30%.  As of the time of this article, Turkey does not offer elimination of the income tax if the income is reinvested into another property.   Taxes on income relevant to real estate, which are payable by residents as well as non-residents, therefore fall into 2 main categories as follows
   1. Capital gains tax on the profit made upon sale of property  and
   2. Tax on income derived from the property such as rental income

A capital gain is the profit made when an asset such as property is sold.  The gain is calculated as the difference between the ‘declared amount’ of the property on sale and the ‘declared amount’ of the property on purchase.   To illustrate with an example – if you purchased a holiday home in Turkey in 2010 for say Euro 100,000 (and at the time amount declared on title deed transfer upon which you paid your stamp duty was Euro 60,000) and sold it in 2013 for Euro 130,000 (amount declared on sale Euro 80,000), then you have realised a profit on sale of Euro 20,000 as the difference between the amounts declared.  This is your capital gain and as a non-Turkish resident you will be liable to pay tax on this gain for the income has arisen in Turkey.  Therefore, you will pay tax on Euro 20,000.   Paying band starts at Turkish Lira 6,000, capital gains less than this are not taxable.  Up to Lira 40,000 tax rate averages at around 23% and above goes up to 35%.  Therefore if your only gain in 2013 is this Euro 20,000, after annual exemptions and lower rate bands, you will end up paying around Euro 3,800, which averages at around 19%.  

For careful tax planning, please note that capital gains tax drops to zero (nothing payable) after 5 years of ownership.  This is to say if you have owned your property in Turkey for no less than 5 years, then there is no capital gains tax payable at all.  

Tax on rental income is similar to capital gains tax.  The income you generate from your Turkish real estate, after allowable expenses against income such as maintenance and some wear & tear, becomes the taxable amount.  This amount is again subject to an annual exemption amount after which tax brackets start at 15% and rise to 35% for net income in excess of Lira 40,000.      
 

How does Turkish income tax compare to other European countries?

For comparison, Russia is not a country that should be considered friendly to landlords.  Evictions can only happen after 6 months of non-payment and are not easy even then.  Plus, regardless of the term of a lease, Russian renters can terminate a lease with three months notice.
Further, foreign real estate investors pay a hefty thirty percent income tax on all income with no available deductions.  You’ll also pay a maximum 1.5% land tax and a maximum 2.2% property tax with rates slightly lower if you purchase outside major cities.

In Austria, you’ll pay a stiff property tax increase as a non-resident.  You’ll also want to beware of extra taxes on property you plan to sell in less than ten years as the capital gain will be taxed at the same 25-30% rate as regular income, but you won’t have expense deductions to soften the blow.
 

France has an unusual tax code as it relates to rental income.  There is a notable difference in the tax you will pay that is solely defined by whether or not you rent a furnished or unfurnished property.  You might also be punished if you are considered a “professional” landlord in France.

In Panama, foreign investors have to duck to avoid the VAT tax on immovable property.  There is also a property tax that increases based on the current value of the property.

Perhaps the worst place to be a landlord is Italy.  Landlords are spanked with a 23-43% tax on rental income, plus residency will cost you a tax on your global income. 

But, Switzerland doesn’t want to be ignored when it comes to the list of top countries for taxing the life out of landlords.  You’ll enjoy a 54.5% tax on rental income for that Swiss chalet.  Ouch. 

There are countries with modestly lower property and landlord taxes, but many would not be a good choice, due to civil unrest, political problems or national economic challenges.  Greece is a good example.  Although the current rates for property and income taxes are lower than in Turkey, Greece has yet to find national financial stability and any solution is likely to come on the backs of property owners and landlords.

You should obviously do your homework before investing in foreign real estate, but property in Turkey should be at the top of your list with its low property and income taxes, high property value growth rates and minimal barriers to foreign property ownership.