A land contract is a type of financing whereby the seller keeps ownership of the asset until the buyer adheres to the repayment schedule provided in the agreement. In Turkey, as in any other country where a real estate transaction is involved, a property tax is an important aspect of ownership and hence needs to be well comprehended to prevent any legal or other complications.
In the instance of a land contract, the matter of ‘who takes care of the property taxes’ usually becomes a gray area, more so in countries like Turkey where notions of property and tax come with their own rules. In this blog, we will define who is responsible for property tax payment with respect to a land contract and will present another aspect regarding the taxation of real estate in Turkey.
The Concept of Land Contract in Turkey
Of course, before elaborating on the issues of property taxes, it is important to take a closer look into the question of what a land contract means in Turkey. A land contract (gayrimenkul satış vaadi sözleşmesi) is a contract where a purchaser commits to buying a property from a seller, under certain conditions, most often providing for gradual payments. It is to be noted, that in this scenario, legal possession of the property is not given to the Buyer until all the payments are made.
Within the framework of this form of contract, the seller keeps the legal possession of the property until its purchase price is fully paid out while the buyer is granted the use and enjoyment of the property. The buyer is allowed to occupy, develop, or do anything on the land but according to the stipulations of the agreement.
An Overview of Real Estate Taxation in Turkey
Property taxes ‘emlak vergisi’ are imposed by local authorities in Turkey with each inhabitant liable to tax on all kinds of real estate property including land, residential and commercial establishments on an annual basis. Property tax rates vary depending on the type, location, and value of the real estate. Typically, taxes levied on land are less than its counterpart taxes levied on building structures, more so, commercial buildings. The most common sorts of property taxes in Turkey include:
Annual Property Tax
The basic levy charged on land and buildings is calculated as a percentage of the official value of the land or building with household furniture inclusive.
Capital Gains Tax
Tax payable on the profits obtained from the sale transaction of real estate, in which case the property in reference has to be disposed of within five years of its purchase by the owner.
VAT
Value Added Tax is charged on the sale of fresh houses erected but does not apply to bare land deals unless some form of development activities are engaged.
Who is in Charge of Paying Property Taxes?
In most transactions involving the buying and selling of property, the legal owner of the property as per records at a given time of taxation is the individual who pays the yearly tax. But when it comes to a land contract, it is different as the buyer does not take immediate ownership. Here’s how the property tax obligations are delineated within a land contract, particularly in Turkey:
1. Seller’s Responsibility During the Contract Term
It is vital to understand that ownership is still vested with the vendor until all payments have been made by the purchaser. This means that the property-related taxes shall be paid by the seller due to the existence of the land contract. During this time, the seller continues to be the party whose name appears on the property deed ("tapuda tescil") which means he is also the taxpayer according to the Turkish authorities.
As the owner on record, the property owner must make sure that the yearly property tax is rendered to the city. However, in this instance, if the seller does not comply with such tax responsibility, the seller could be subjected to consequences such as a fine or other measures from the municipality, such as a legal suit.
2. Possession and Use of the Property by the Buyer
Although the seller of a property is liable for tax-related requirements on the property, the buyer is often allowed to take possession and make use of the property under a land contract. In some instances, land contracts in Turkey may have a clause in them that allows for the buyer to pay back the seller for any property taxes that the seller incurs during the duration of the land contract. But, this is mostly a condition of the contract and not a statutory requirement between the owner and the buyer.
It is very vital that both parties expressly address the issues of property tax in the Land Use Agreement. A good contract will state if the buyer is to settle with the seller’s property taxes or whether the seller will incur it entirely until such a time when the buyer is given ownership rights.
3. Upon Completion of the Land Contract
Upon making all the payments required in the land contract, the seller will be required to give the buyer the legal title of the property. The moment the title of the property is transferred to the buyer, he will be regarded as the owner of the legal rights without prejudice of the tax accountability which will be imposed from that moment on all the property owned.
Even before the property title is issued in their names, it is incumbent upon buyers to ensure that every tax owed on the property has been cleared. At the time of the transfer, if there are any delinquent taxes owing on the property, the recent transferee may be liable for those taxes. Therefore it is prudent to carry out a detailed investigation with regards to the tax status of the property before executing the transfer.
Tax Exemptions or Relief of Tax Burden
It is also worth mentioning that Turkey has such tax exemptions and tax reductions under certain conditions. For instance:
- Possession of a new residence allows one for some time to pay a lower property tax rate to the municipality.
- Certain foreign investors shall be entitled to a VAT exemption for certain real estate purchases if additional terms are satisfied.
Nevertheless, these exemptions tend not to apply to land contracts unless the land contract is completed by registration of title in which the relevant property falls under the purview of Turkish laws concerning taxation of property.
Conclusion
In Turkey, the issue of who bears the property taxes imposed on land contracts remains with the selling party chiefly, until the ownership of such property is devolved onto the buyer. Nonetheless, the land contract can also stipulate such responsibilities and the workings of payment and reimbursement of taxes to each party to the contract. Caution is advised for the buyers concerning the taxation regime and other policy factors that may impact the cost of the property before they take over the property.
