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Sobhaniyan, Seyyed Mohammad Hadi

Article Tax on capital gains of housing estate

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To cite this document: Sobhaniyan, S.M.H., Aghajani Memar, E., & Tootoonchi Maleki, S. (2018). Tax on Capital Gains of Housing Estate; a Sustainable Source of Income for Municipalities and an Appropriate Tool to Control Speculation in the Housing Market. Urban Economics and , 6(1(21)), 85-97 www.iueam.ir Indexed in: ISC, EconLit, Econbiz, SID, RICeST, Magiran, Civilica, Google Scholar, Noormags, Ensani. ISSN: 2345-2870

Tax on Capital Gains of Housing Estate; a Sustainable Source of Income for Municipalities and an Appropriate Tool to Control Speculation in the Housing Market Seyyed Mohammad Hadi Sobhaniyan Faculty Member, Faculty of Management, , Tehran, Iran Ehsan Aghajani Memar* Imam Sadiq University, Tehran, Iran Saeid Tootoonchi Maleki , Iran Received: 2016/03/09 Accepted: 2016/05/07 Abstract: By expanding the scope and dimensions of urban life, municipalities, as the main charge of planning system and urban management, have great responsibility and commitment toward society and citizens. It is obvious that performing tasks and duties pertaining to municipalities requires financial resources and appropriate facilities. In our country, unsustainability of municipal revenues has been changed into as one of the main features of cities’ finance. Thus, introducing sustainable source of income for municipalities can help remarkably functional independence and their continuity of servicing. One of the other problems of urban system in Iran is price volatility in the housing sector. This has resulted in deviation of capital toward housing speculation as well as disorders of other investment markets in the country because of structural problems of economy and inefficiencies of the government’s policies resulting in reducing investment in economic productive sectors, particularly in some years. Therefore, it is necessary to adopt practical strategies to control speculation activities and fluctuations in housing prices by policy-makers. A tax base entitled “tax on capital gains of housing estate” has been

Downloaded from iueam.ir at 17:47 +0430 on Monday August 20th 2018 [ DOI: 10.29252/iueam.6.21.83 ] introduced by using descriptive-analytical method. It can follow two purposes in urban management and planning system simultaneously. The first goal is to create sustainable revenues for municipalities by using the capacity of transactions and exchanges in housing estate market. The second purpose is to create an efficient and effective tool in management and policy-making of housing estate market aiming to avoid speculative trading in this market. Moreover, this policy is in accordance with paragraph 17 of general policies of resistance economy referring to increase in the share of tax revenues. Keywords: tax on capital gains, sustainable revenue, speculation, housing estate JEL Classification: H24, H71, D84, R38

* Corresponding Author: [email protected] 68______Urban Economics and Management

1- Introduction bubbles (Gholizadeh & Kamyab, 2008; Urbanization and urban development Khalili Araghi & Rahmani; 2001). are one of the contemporary phenomena. International studies have also noted the At the same time with increase in number direct impact of speculative demand on of cities and urban population, one of the formation of price bubbles in the housing most major problems facing policy makers market (Malpezzi & Wachter, 2005). and urban planners is how to finance In Iran, speculative motivations have urban expenditures in a stable manner and paved the way for capitals to deviate to provide citizens with sufficient public towards intermediary sector, resulting in services (Ghorbani & Azimi, 2014). reduction of investment in productive Therefore, sustainable and independence economic sectors, particularly in some of municipal revenue sources are of years. In contrast, the economy will enjoy fundamental importance (Bahl et al., increase in job opportunities, unemployment 2013). Sustainable sources of finance reduction and, in turn, economic growth must be yielded from sources that rights and development, if capitals frozen in of the posterity would not be violated, housing sector are mobilized into production quality of life in metropolitan areas would sector and productive investment. Therefore, not be damaged, and vital resources for the question is: is there an instrument by future generations would not be ruined which the both problem of municipal (Navabakhsh & Siahpoush, 2009). revenue instability and housing market Furthermore, sustainable revenue sources speculation can be resolved? Research play a remarkable role in municipalities’ hypothesis is that introduction of a new performance independence and service- tax basis, referred to as “tax on capital providing continuity. gain from real estate and housing”, not One of the problems of Iranian urban only can be a stable revenue source for system is the price fluctuation in the municipalities, but also can reduce speculative housing sector. Because of the population motivations in housing sector. pyramid and increase in demand caused by arrival of young population demanding 2- Literature Review house, on the one hand, and disorder in a) Foreign Researches other investment markets due to economic Theoretical studies and practical problems, injection of unplanned liquidity experiments in countries around the world

Downloaded from iueam.ir at 17:47 +0430 on Monday August 20th 2018 [ DOI: 10.29252/iueam.6.21.83 ] and, continuous and substantial growth of show that taxation of capital gains on real the house prices, on the other hand, Iranian estate can be used as an appropriate housing market nearly has become an policy instrument. Countries choose the investment market with guaranteed profit aforementioned policy to achieve different and low risk; thus, by provoking growth goals such as reducing income gap and of the housing demand, speculative inequality growth, mobilizing capitals, etc. motivations has created or intensified In the theoretical aspect, taxation of price bubble in this market (Khodadadkashi financial transactions with the goal of & Razban, 2014). Some of Iranian decreasing fluctuation in asset prices was researchers have explained existence of firstly introduced by Keynes (1936) for capital the speculative demand in housing market market and afterwards by Tobin (1978) and its role in formation of the price for money market (Aregger et al., 2013). 68______Tax on Capital Gains of Housing Estate; a Sustainable Source …

Eyraud (2014) argued that taxes on Other countries experience show that revenues from speculative activities in the asset and land tax constitutes a part of housing market can reduce the entry of local government’s revenue in most these types of investors to the real estate countries. Asset tax is a stable and and housing market by moderating the predictable revenue source for local expectation of profiting from the traders governments and improves independence of this market compared to other investment of local governments from central ones. opportunities, which may in some way Land and real estate tax was introduced in prevent the formation of price bubbles the Baltic states in the early 1990s and and the big turbulence in this market. was put forward as an essential source of Kholdy & Sohrabian (2011) noted municipal tax revenue. In Estonia, land that empirical evidence in some countries tax introduced in 1993. Objective of the confirms that there is a convergence imposition of land tax was to improve between asset bubbles and speculative land use and the tax was mostly a source activities, and speculative activities play a of revenue for local government. Land tax key role in determining housing prices. is the only tax that municipality of Hsu & Yuan (2001) show that non- Estonia makes decisions regarding its taxation of capital gain on housing in rates independently. Estonia parliament Hong Kong has resulted in concertation specifies general framework of land tax of capitals in housing sector and rates for municipalities. government does not have any tools to In countries such as Japan, Canada, extract the capitals from that sector. China, and parts of Switzerland, b) Iranian Researches municipalities are required to collect land In their study, Zaer et. al., (2007) point tax. In Japan, fixed assets are evaluated out that taxation of land and building by municipal officials and price of can propel housing market into efficiency residential areas are approximated regarding and impede speculation in the market. archaism and reduction of their value Abdi & Askariazad (2008) state that relative to identical new residential areas. main objective of taxation of capital gain In Germany, department of finance, with is to restrict speculative activities in the collaboration of municipalities, evaluates market. real estates. In countries with federal Gholizadeh & Amiri (2013) assess system such as the United States, estate

Downloaded from iueam.ir at 17:47 +0430 on Monday August 20th 2018 [ DOI: 10.29252/iueam.6.21.83 ] housing sector-related tax regimes in tax is not collected nationally but locally, countries around the world and conclude therefore it varies by state. This type of that governments, with the goal of tax depends on value and status of the controlling speculation in housing market, estate while characteristics and conditions use different tax tools including taxation of its owner almost do not matter. Estate of capital gain on housing. tax revenues belongs completely to In their study “Role of Speculation in municipalities. In Canada, estate tax in Variations of Housing Price in Iran every province usually is collected in (1991-2008)”, Khodadadkashi & Razban municipal level. In general, this tax is (2014) put forward taxation as a solution determined according to specified annual to restrict speculative activities in housing value of the estate and its rate varies by market. number of the floors and municipal area 66______Urban Economics and Management

(Zaer et.al, 2007). In the country, a fifty- people (Sharma, 2008). Capital gain on percent discount is applied for amount of real estate is taxed in , unless the the estate gain (Harding, 2013). In India, property is owned for more than five housing tax is collected by municipalities, years, or it is owner’s main home (Eyraud, while one of the effective criterions for 2014). Table 1 represents some information the tax amount is quantity of the about other countries’ experience in taxation infrastructures and its accessibility for the of capital gain on real estate and its features.

Table1. Some Features of Taxation of Capital Gain on Real Estates in Different Countries Time length of holding the Is capital gain on property to grant Country personal home Is capital gain on real estate taxed? exemption or rate reduction taxed? (holding period test) Yes. It is considered as taxable income. Real estates Czech No occupied as personal home at least for two years or owned by 5 years Republic the possessor for more than five years are exempted. Yes. It is taxed in a way similar to tax planning Denmark No excluding personal owner-occupied home. Estonia No Yes. It is considered as taxable income. - Yes. It is considered as capital gain. Finland applies a minimum deduction of 20% of the sales price; but if the Finland No 10 years property has been held for at least ten years, the minimum deduction is 40%. Yes. The country applies a 19% tax rate with some France No exemptions. Tax on capital gain from assets is calculated 30 years aside from other taxable incomes. Germany No Yes. It is considered in general taxation. 10 years Greece Yes Yes. A tax rate of 15% is applied. - Hungary Yes Yes. A tax rate of 16% is imposed. 15 years Yes. Tax on capital gain from assets is calculated Ireland No - aside from other taxable incomes. Yes. A tax rate of 20% is levied. The property is tax Italy No 5 years exempted if it has been held for more than five years. Yes. Tax rate is 15%, but if the property is a personal No home, it is entirely tax exempted. Yes. It considered in general taxation. If the property has No 5 years been held for more than five years, tax exemption is applied. Yes. Portugal includes 50% of gains on real estate as taxable income and further allows indexation if the Portugal No - gain is derived from a property that has been held for two years or more. Yes. Depending on time length of holding the No 20 years property, tax rate varies from 0% to 25%. Yes. Net capital gain up to a fixed amount is taxed with a

Downloaded from iueam.ir at 17:47 +0430 on Monday August 20th 2018 [ DOI: 10.29252/iueam.6.21.83 ] United rate of 18% and gains exceeding this amount are taxed Yes - Kingdom with a 28% rate. Capital gains are taxed separately from other taxable income received by the individual. Yes. Tax on capital gain made on the property decreases Japan Yes after 5 years. Capital gains are taxed separately from 5 years other taxable income received by the individual. Yes. Tax on capital gain made on the property Korea Yes 10 years decreases after 10 years. Yes. If the property has been held for more than five Turkey Yes 5 years years, tax exemption is applied. Yes. Some exemptions Yes. If the property has been held for less than one will be applied if the United year, it is taxed according to the individuals’ general residential property 1 year States income tax rate. But if the property has been held for has been held for longer than one year, a separate rate will be applied. more than two years. Source: (Harding, 2013)

68______Tax on Capital Gains of Housing Estate; a Sustainable Source …

3- Theoretical Background sector, i.e. purchase and sale of hosing Taxation of Capital Gain on Real Estates with the aim of earning gain. In the and Housing economic view, this is an undesirable Tax on capital gain from real estate situation and can play a major role in and housing ownership is a component of spreading and intensifying intermediary capital gains tax that most of advanced activities, reducing productive investments, countries such as the Organization for increasing unemployment rate, decreasing Economic Co-Operation and Development production and ultimately waning economic (OECD) members have admitted and growth. This behavior is completely applied it as an element of income tax for based on microeconomic theory on risk- a near century. This tax is levied on averse individuals facing uncertain housing price growth, i.e. the difference scenarios. According to the theory for in price between purchase and sale, individuals with high risk-aversion, utility depriving its owner of part of the capital of certain amounts outweighs average gain. Given that capital gain on the housing utility of uncertain amounts. As indicated in Iran, especially in large cities, often in figure 1, for the public that are mostly exceeds the average capital gain in many unwilling to bear risk, average but certain productive activities, a lot of capitals are gain made on ownership of estate and deviated towards the sector and departing housing (point B) yields more utility than from productive ones. In other words, low variable but uncertain gains from other riskiness of investment in housing against economic sectors (utility level U(B) high riskiness of investment in production compared with the average of utility sector has led massive capitals into levels U(C) and U(A)). (Abdi & nonproductive activities in housing Askariazad, 2008).

Utility (U)

Individual’s Utility U(C)

Utility of Certain Amounts U(B)

Average Utility of Uncertain Amounts

Downloaded from iueam.ir at 17:47 +0430 on Monday August 20th 2018 [ DOI: 10.29252/iueam.6.21.83 ] U(A)

Amount A B C Fig1. Certain Compared with Uncertain Utility for Risk-Averse Individuals

Here, the raised question is how to productive investments, increasing hamper the deviation of capitals from unemployment rate, decreasing production productive sectors towards speculative and ultimately waning economic growth). activities in housing sector (activities that Evidence show that monetary policy can play a major role in spreading and does not work in controlling speculative intensifying intermediary activities, reducing motivations in housing sector because 89______Urban Economics and Management

increased purchasing power caused by central or local government’s public expansionary policies gives people more budget. Therefore, disregarding for power to purchase and as a result more distribution of the rents resulted by individuals with the speculative motivations implementing urban development plans participate in the market. Furthermore, can lead to negative impacts on the desired contractionary policies decrease purchasing development of the city (Meratnia, 2000). power of all individuals; thus, it seems The question is: should not people that taxation of capital gain on real estates pay the cost of using public goods and, if and housing as a policy tool can mobilize so, what should be the basis? This capitals and result in reduction and control question is answered in public finance of price fluctuations and speculative literature. According to benefit principle, activities in housing sector. each user should participate in cost of Moreover, one can enumerate at least provision of a commodity relative to three other reasons as theoretical foundations his/her benefiting from the commodity. or necessities for levying tax on capital One aspect of benefiting from public gain made on real estate and housing: services relates to increase in value of 1- Henry George, a nineteenth-century properties, thus it can be argued that value theoretician and philosopher, believes that growth of individuals’ property should be taking a percentage of gains on land and taken as the basis for taxation. Therefore, real estates as tax is one of the fairest in terms of economic theory, taxation of possible taxes, because it hinders gains of capital gain (on real estate, housing, etc.) godsend sources to be exploited by an elite. is considered as justifiable (Carroll & 2- At the present time, according to Prante, 2012). existing tax regime procedures, difference The Way of Taxing Capital Gains on between the sale price and purchase Real Estate and Housing book-value is documented and is subject Many times, housing market faces to income tax. However, Iran, contrary to demand surplus. The surplus will lead most countries around the world, does not suppliers and estate owners to neutralize tax difference between sale price of real any tax by increasing the price and to estate and housing and their purchasing transfer the tax to buyers and this value. situation ultimately will result in more 3- Many times it is observed that a burden on residential house applicants

Downloaded from iueam.ir at 17:47 +0430 on Monday August 20th 2018 [ DOI: 10.29252/iueam.6.21.83 ] person has purchased a property (including and extra growth of housing price, thus, apartment, workhouse, land, and garden) imposition of any type of tax cannot meet and after a while, because of development the need of policy-maker to control of urban services (such as parks and speculation in housing market. recreation centers, medical centers, A useful suggestion to the problem educational centers and access to public can be taxation of price growth of real transport network), price of the property estates and housing. The way of action in has been increased without being a result this tax basis is as follows: if price growth of the owner’s effort or general prices of real estates and housing was more than inflation. In this case, the owner has been general inflation of the economy, the rewarded a gain resulted from expansion excess of price growth over the inflation of public goods and services, financed by is subject to price growth tax. It seems 89______Tax on Capital Gains of Housing Estate; a Sustainable Source …

that this is the only instrument that does legislations to impede tax evasion, because, not contain cascading effects on prices, firstly, all things regarding housing transfer because, by levying tax on housing price are registered in notary publics; thus, it growth, main part of price fluctuations will be impossible for a transaction to be beyond inflation will not be acquired by registered without paying tax on price sellers but it will be taken as tax and this growth. Secondly, respecting conflict of will result in reduction or even elimination interests of the two parties (buyer and of supplier’s motivation to offer higher seller), transaction security of the tax is prices. On the other side, this new tax very high and tax evasion almost is basis simply requires determination of impossible. For example, it is unlikely necessary rates and specification of that transactions are not registered in executive instructions and does not notary publics in order to evade the tax, require complicated legitimation and because buyers avoid any non-official formation of any particular institution. transaction as they desire not only to Implementation of this tax basis needs transact with security, but also to prevent determination of two key rates: taxable any likely fraud by the seller. This will price growth rate and tax rate on taxable entail registering all housing transactions price growth (Edwards, 2012). in official notary publics, without any With regards to the point that housing force by the government. Furthermore, it like other goods is facing general inflation is impossible for seller and buyer to of the economy, its nominal value should collude with each other, because if the grow to the extent that its real value be seller suggests paying a part of the tax to maintained; thus, it is reasonable for the buyer in order to evasion and the housing price to be let to grow annually buyer consents to documentation of the as much of general inflation of the tax-exempted price instead of the actual economy (Pomerleau, 2014). price, the buyer will not give his/her Another rate to be specified is the tax consent, because, the present buyer will rate on taxable price growth. Generally be the future seller and today’s documented speaking, controlling speculation in housing price will be the tomorrow’s price in the market by taxation of capital gain on real case of calculating tax exemption; therefore, estate and housing requires levying a rate in the time of selling the property, he/she with a sufficient deterrence. The rate must will have less margin to be taxed (Zhang,

Downloaded from iueam.ir at 17:47 +0430 on Monday August 20th 2018 [ DOI: 10.29252/iueam.6.21.83 ] at least be determined as high as it 2013). equalizes marginal gain of housing sector with average gain of the whole economy1 4- Research Method (Tsai, 2013). Here, by explaining some problems After determining the two rates, with of the Iranian macro-economy including regards to self-controlling mechanism of speculation in housing market and this tax basis, one can claim that uncertainty and instability of municipalities’ implementation of the tax does not require revenue, we try to introduce a new tax establishing particular institutions and basis that simultaneously mitigates both problems. In the process of doing this, we 1- It should be noted that levying higher rates shifts apply descriptive-analytic method. investors’ attention from housing sector and can intensify extraction of frozen capitals from the sector. 89______Urban Economics and Management

5- Results in negative impact on housing production, Based on the presented theoretical agents that produce and supply housing and empirical background, current part of units during specific time intervals can be the paper represents functions of tax on exempted; thus, this tax solely targets capital gain from real estate and housing, speculative tax and raises cost of these as well as fundamental considerations demands in urban land and housing regarding the tax basis. market. Therefore, with regard to above Tax on Capital Gain from Real Estate arguments and following considerations, and Housing, a Useful Instrument to Control tax on gain from real estate and housing Speculation in Housing Market does not affect cost of productive In Iranian economy, due to increase investment and consumption demand; in liquidity and emerging a phenomena hence, government (or local governments), referred to as unplanned capitals (particularly by levying tax on gain from real estate in recent years), problems caused by and housing, can restrain entry of non- credit resources, as well as non-attraction productive capitals into this sector. of some productive activities in comparison Tax on Capital Gain from Real Estate with other economic activities, many and Housing; a Stable Revenue Source for times the liquidity is led into non-productive Municipalities sectors and is applied to speculate on In a general classification, municipal assets such as housing and real estates. In revenue sources are divided into internal these situations, some monetary and fiscal and external ones. In terms of revenue policies by the government could firstly stability, internal revenues1 are more stable recover economic prosperity so that, than external ones2 (Sharzei & Majed, because of very likely long-term benefits, 2011). In other words, revenues collected enabling business environment of these by municipalities from inside of cities, sectors encourages economic agents to act such as tax and duties, provide more in the sectors. Secondly, the government financial stability than other revenue should raise cost of mobilizing unplanned sources, such as government aid and loan. capitals into non-productive sectors Assessment of municipal revenue (Gholizadeh & Amiri, 2013). A solution sources shows that stable sources such as can be taxation of gain on speculative land and real estate tax, and revenues activities. yielded from service provision are

Downloaded from iueam.ir at 17:47 +0430 on Monday August 20th 2018 [ DOI: 10.29252/iueam.6.21.83 ] Collecting this type of tax, by adjusting relatively neglected and attention is given speculators’ profit expectations in comparison to instable revenues such as the so-called with other investment opportunities, can “density permits” duties, building violation decrease their participation in housing mulcts, and the Article 100 duties;3 thus, and real estate market and partly hinder price bubbles formation and huge fluctuations in the market. 1- It consists of two group of revenue sources: revenues from duties or taxes and non-tax revenues. Revenues In order to separate consumption collected from service provision and mulcts are considered as non-tax revenues. demand and speculative demand in this 2 External revenues consist of government aids and tax, the first property that is individuals’ loans. These sources consist of those that are collected outside of the municipality organization. consumption demand can be exempted. In 3- An article of Iranian Municipalities Legislation that addition, in order for this tax not to result specifies penalty of constructing without (or inconsistent with) a license. 89______Tax on Capital Gains of Housing Estate; a Sustainable Source …

their portion in total revenues has been addition, it is difficult for taxpayers to increased. evade the tax on these assets. Local At the moment, systems of taxing government can easily control real estate real estates (e.g. tax on housing gain) has and they have necessary instruments been applied as a main factor to increase to force individuals to pay the tax. Also, stable revenues in local governments of because local officials have more countries around the world. information regarding real estate and According to economic texts, stable housing than central government, they revenue briefly has five characteristics: 1- have advantage in collecting this type of its source is immortal or has alternative(s); tax; thus, asset tax, compared with other 2- it is continuously collectable; 3- it taxes (including consumption and income does not oscillate with financial fluctuation; tax), can be considered as a relatively 4- it increases in step with costs rising; and stable revenue source for municipalities. 5- it does not deteriorate urban development On the other hand, this type of local tax (Ziari & Mahdian Behnammiri, 2013). increases local power and accountability According to the definition of tax on of local governments (municipalities) capital gain from real estate and housing, (Bird, 2000). value of this tax basis is largely dependent Fundamental Considerations in Designing on municipal expenditures and relates to a System to Tax Capital Gain from Real those costs that leads the estates and Estate and Housing buildings to increase in value. Moreover, In designing a system to tax capital this tax is rarely affected by recession and gain from real estate and housing, issues, prosperity cycles of housing market; thus, such as the way of treating inflation from this point of view, the tax is viable. (nominal increase in value of assets), time Furthermore, since origin of the tax is length of holding the asset, specifying tax effective urban development expenditures basis, exemption thresholds, regional that increase the value of urban properties, exemptions and so on, need to be considered. and with regard to continuity of Some of the issues are presented in the municipalities’ development expenditures, following. this revenue source is stable and continual Capital gain and inflation: Increase in and can be collected continuously. On the value of an asset caused by general other hand, since this tax has a direct growth of prices is a nominal increscent

Downloaded from iueam.ir at 17:47 +0430 on Monday August 20th 2018 [ DOI: 10.29252/iueam.6.21.83 ] relation with maintenance of urban space, and is not included in capital gain. If it has another aspect for sustainability. value increase of the property is not Economists consider tax on real estate indexed and the difference in value and housing as an appropriate tax for between of purchase and sale price is local governments because it is based on taxed, then this tax would not be an benefits that every person receives from income tax but a wealth tax. Therefore, in urban services (Bird and Slack, 2013) designing system of tax on capital gain, and, of course, there is a relation between indexation must decidedly be considered services financed at local level (e.g. and real increase in value must be taken establishing schools, access to roads and as tax basis. expressways etc.) and gains related to It is important to take attention to the value of properties (Fischel, 2001). In above point in economies with high 89______Urban Economics and Management

inflations, like Iran, because if the necessary to choose optimal short-term indexation is not taken account, economic and long-term tax rate on capital gain. actors and even buyers and sellers Capital gain and capital loss: Sometime without any speculative motivations often realized sale price of the property is less have to pay major part of their assets than its purchasing price and sometimes increased nominally as tax. 1 maintenance costs of the property and Long-term and short-term capital gain: transaction cost are greater than the Defining capital gain as a tax basis without capital gain. In these cases, property considering time length of holding the owner terminologically suffers capital asset is of defects. In legislation of some loss; thus, tax system must determine the countries, only short-term (usually one way of treating the issue. Can capital loss year or less) transfers or capital gains are in an asset be exchanged with capital gain taxed and sale of assets in long-term is in another asset? In addition, can capital exempted or taxed with a lower rate.2 It is loss in current period be taken into account done because goal of tax regime is to tax as capital cost in the next period? It is speculative activities and to control them obvious that every method has different and ultimately to support long-term impacts on the economic system. investment; thus, lowering tax rate of Separating consumption and investment long-term capital gain encourages risk assets: It is necessary to distinguish taking and entrepreneurship in the between transactions for consumption economy (Burman & Patrick, 2012). from other transaction. By selling and Levying this tax on short-term transactions purchasing assets, many people do not increases cost of transferring assets and intend to yield gain but they solely aim to restricts demand and supply of assets in upturn their residential or business property. short-term. This action ultimately controls If these people’s capital gain is taxed, and restricts speculation in market for this their ability to upturn their property (often type of assets. with consumption aims) will decrease. In In specifying optimal tax rate on taxation of capital gain on property and short-term and long-term ranges, two housing, various methods can be used to matters need to be considered simultaneously. separate the transactions, including: If the short-term rate of tax on capital 1) Exemption of owner-occupied gain is higher than the long-term one, property, regardless of number of transactions

Downloaded from iueam.ir at 17:47 +0430 on Monday August 20th 2018 [ DOI: 10.29252/iueam.6.21.83 ] speculative motivations in the economy made on it will decrease that is considered desired 2) Exemption of owner-occupied for the economy. At the same time, this property provided that it is not transacted will result in freezing properties, i.e. more than one time during a year or property owners put sale of the property particular years. off to benefit the lower tax rates. This However, if selling and purchasing of leads to delay in applying the property in asset is intended to investment, productive higher return investments. Therefore, it is and speculative investment need to be separated. 1- In particular cases, it is possible for growth of housing Specifying exemptions for underdeveloped and property price index to be more than growth of general prices index. In these cases, it is necessary to areas and urban old textures: One of the adjust capital gain to inflation rate of the asset group. main functions of taxation of capital gain 2- See table 1 for more details. 89______Tax on Capital Gains of Housing Estate; a Sustainable Source …

on property and housing is to restrain or development and management. In section reduce speculative demand in housing A, Article 174 of the Fifth Five-Year market and subsequently to control price Development Plan, the legislator requires fluctuations. Islamic City Councils and municipalities One requirement of achieving the and other related entities to consider a goal is to reduce housing demand in system for stable revenues of municipalities populous cities and provide incentives to by reducing fees of construction permits non-immigration. Exemption of for business, office, and industrial underdeveloped and underprivileged application appropriate with residential areas from paying tax on capital gain of use of the same area regarding the property and housing can motivate territorial conditions and local situation as investors to pursue more growth of well as transmuting these fees into service housing price in these areas. This policy provision duties of instructed units and can act as a stimulus, shifting capitals duties of value added of lands and from more developed area towards less properties caused by implementing urban developed ones, and improving old development plans, until end of the first textures with the aim of profit making. year of the five-year plan. This situation will facilitate development In article 23 of Comprehensive Plan of these areas;1 thus, will allay migration for Stable Revenues and Other Revenues from less developed areas towards more Sources of Tehran Municipality,3 in order developed ones. to manage land and building market and Some Legal Backgrounds Regarding hindering speculation over it and Tax on Capital Gain from Property and balancing value added of construction Housing in Iran sector with other productive sectors, Although laws and regulations regarding Tehran Municipality is required to draft a taxation shows that Iranian legal system bill on the way of collecting duties from has not considered tax on capital gain value-added caused by urban construction from property and housing, but, with activities and increase in value of assets recourse to various laws, cases can be (land, real estate) caused by urban found that their rationale is similar to tax development actions as of enouncing the on capital gain from property and housing act as long as one year and a half and and they can be used to introduce the new submit it to the Tehran City Council.

Downloaded from iueam.ir at 17:47 +0430 on Monday August 20th 2018 [ DOI: 10.29252/iueam.6.21.83 ] tax basis to the country’s legal system. In Also, Tehran City Council enacted an act section 3 and 4, General Policies of the titled “determination of financial criteria 2 System Regarding Municipalities has and amendment of the way of collecting emphasized the importance of providing duties from urban properties in enforcing stable sources in urban and rural the new land-use plans”,4 article 2 of which specifies that "with reference to the

1- Based on the same argument, exemptions can be section 1 of appendix 5 of Master Plan granted to urban old textures to stimulate mobilization Document, as of enouncement date of this of capitals from other urban areas towards old textures in order to increase investment in these textures. Therefore, from this point of view, the tax can be also used by municipalities as a policy tool to develop urban 3- Enacted during 64th, 66th, and 68th official-public old textures. special and ordinary sessions of the Tehran City 2- Imparted by the leader Ayatollah Khamenei at Council in January, 2008. February 15, 2011. 4- February 14, 2010. 88______Urban Economics and Management

act and simultaneously with announcing new tax basis, that is tax on capital gain and enforcing the new land-use plans, from property and housing experienced in Tehran Municipality is required to collect countries around the world, to Iran will a special duty named “score of use in mitigate the two problems significantly. zoning” of the property relative to This tax (with keeping in mind the admissible volume of massing according considerations described above) is to the criteria and regulations when imposed on the growth of hosing price, issuing building license from owners that i.e. the difference between buy and sell their properties use is changed and price; thus, it dispossesses the owner of zoning-to-massing score will cause their part of the capital gain made from property value to increase, and to deposit ownership of real estate. it in a bank account and expend it on This tax basis not only provide new acquisition of land and properties and stable revenue sources for municipalities, plans for urban development enacted every but also, by controlling price fluctuation, year by Tehran City Council simultaneous can play a major role in hindering shifting with Tehran Municipality’s budget. capitals towards housing sector with the In section 16 and 18 of the Urban aim of speculative activities. In other Rehabilitation and Development words, taxation of gain on speculative (enacted at November 28, 1968), a duty activities in housing market, by adjusting named “Quality Due” was introduced. speculators expectations regarding profits Section 18 of the law specifies evaluation of this market compared to other of properties and determining compensation investment opportunities, can decrease and paying it to owners whose property participation of these investors (speculators) has been seized entirely or partly during in property and housing market and this enforcement of rehabilitation plans, will hider formation of price bubbles and construction, reparation and development acute fluctuations of the market. Ultimately, of pathways and provision of public this will result in meeting consumption needs. The law also points out that demand more easily and improving urban owners whose property quality has welfare and life quality. increased by enforcement of those plans must pay the Quality Due. However, 7- References Quality Due Law was abolished entirely Abdi, M., & Askariazad, H. (2008). Application

Downloaded from iueam.ir at 17:47 +0430 on Monday August 20th 2018 [ DOI: 10.29252/iueam.6.21.83 ] by the Quality Due Abolishment Law of Capital Gains Tax on Correction of (enacted at November 18, 1981). Demand Structure and Adjustment of Housing Price fluctuations. Economic Journal, 8(81 & 82), 41-68. (In Persian) 6- Conclusion and Discussion Aregger, N., Brown, M., & Rossi, E. (2013). Nowadays, lack and instability of Transaction taxes, capital gains taxes Iranian municipalities’ some revenue and house prices (No. 2013-02). sources and speculative demand in Bahl, R. W., Linn, J. F., & Wetzel, D. L. housing market that intensify price (Eds.). (2013). Financing metropolitan fluctuations are considered as two governments in developing countries. economic problems of the country. Cambridge, MA: Lincoln Institute of According to arguments represented here, Land Policy. it can be explained that introducing the 88______Tax on Capital Gains of Housing Estate; a Sustainable Source …

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