By NEIL HARTNELL
Tribune Business Editor
The Government was yesterday warned it "will create havoc" if it imposes triple-digit tax increases on hundreds of foreign second home owners via planned real property tax reforms.
Attorneys and realtors united in "outrage" over a seemingly innocuous cluse in the Real Property Tax (Amendment) Bill 2018 that alters the definition of "owner-occupied property", with many admitting they had been unaware of the move until alerted by Tribune Business.
This newspaper was itself informed of the reform, which requires "owner-occupiers" to reside in their homes for six months or more per year, by an attorney alarmed at the negative impact for Family Islands economies that rely heavily on the second home market as a key driver.
The Real Property Tax Act currently defines "owner-occupiers" as persons who reside in their homes "on a permanent or seasonal basis". This allows The Bahamas' second homeowner community, many of whom are in this nation for just a few months per year, to be taxed at the "owner-occupier rate" that was reduced in 2016.
They currently pay a rate of five-eighths of one percent on their home's value between $250,000 and $500,000, with the portion above $500,000 taxed at one percent. The total sum they pay is also capped at $50,000 per annum.
However, the bill proposes to eliminate the term "seasonal basis" and replace it with a definition of "permanent basis" that is "six months or longer".
Tribune Business's attorney contact explained that this has "significant" implications for the second home market, as homeowners will now have to reside in their Bahamas properties for a minimum of six months per year to retain "owner-occupied" status.
Should they fail to meet this benchmark, the attorney said their properties face being reclassified as "residential property" or "other property". Since non-Bahamians cannot qualify for the former, they will fall into the 'other property' category where the tax rates are much steeper.
The attorney revealed that real estate classified as 'other property' is taxed at a rate of three-quarter of 1 per cent on its first $500,000, with a 2 per cent rate applied to its value above this threshold. And the 50 per cent 'cap' does not apply.
With the tax rate effectively doubling, the attorney said a $2 million vacation home would see its tax bill jump from around $18,000 to $33,000 if the Bill is passed as is - a $15,000 or 83.3 per cent increase.
They suggested the impact was even more startling for a $10 million home, which currently pays $50,000 based on the real property tax 'cap'. With this removed, should the homeowner fall out of the owner-occupied category, the attorney calculated that the tax bill will rise to around $193,000 - a $143,000 or 286 per cent increase.
"I do not know if this was an oversight, [but] it has significant implications for the luxury home market," the attorney said. "I have spoken to several attorneys who all agree that the proposed changes will result in the tax increases as outlined.
"I hope this is all a drafting error and that the Government will rectify it in their clean-up in the Bills in the House of Assembly. That said, I have not seen anything to suggest that this was an error or not their intention. Second homeowners keep many of our Out Island settlements alive. We cannot tax ourselves out of business."
With all attention focused on the 60 per cent VAT rate hike, the attorney said the real property tax change was a prime example of the 'devil in the detail' that was contained the slew of legislative reforms that accompanied the 2018-2019 Budget.
They said the main Budget communication, delivered by K P Turnquest, the Deputy Prime Minister, had made no mention of the 'owner-occupied' definition change, and they queried how many other market-changing reforms were in danger of being missed by the private sector until it was too late.
Mike Lightbourn, Coldwell Banker Lightbourn Realty's president, told Tribune Business that the Government's planned reforms will likely impact 90 per cent of the Bahamas' second home market.
He branded the 'owner-occupied' change's implications as "ridiculous", given that the dramatic taxation increase risked undermining the Bahamas' price competitiveness and driving foreign buyers to rival Caribbean destinations that did not impose such cost burdens.
"That's bull. That's ridiculous," Mr Lightbourn said. "This is the first time I'm hearing about this. We're trying to attract these people here. These folks really can go to the Cayman Islands and Turks & Caicos, and pay no property tax.
"It's like they [the Government] slapped a lot of things together without thinking about it. That's going to hurt. Most foreigners that buy second homes don't live in them for more than six months.
"That will affect at least 90 per cent of the foreign homeowners, and they're the ones that pay the taxes by and large. Oh God, I'm thinking of some sales we have now that it could kill."
Adrian White, head of the Bahamas Bar Association's real estate committee, agreed that the Bill's likely effect was "a real concern" given the "quite severe increase" in tax bills it will produce.
"It looks like the open opportunity for owner-occupied status is being limited to residents in occupancy for six months," Mr White told Tribune Business. "The overall amounts payable are going to increase quite severely depending on the overall value of the property in question. It's going to be a big increase if that Bill is passed; it certainly would be."
He added that the Bill seemed to be adopting "policies that have surfaced in the past that may not have been as strict and costly as they are in this draft Bill".
"Any time you're looking at changing the tax rate on a market and industry there's going to be a lot of push back and concern," Mr White added of the legislation. "It's certainly a real concern that needs to be considered, and if it can be passed without taking such a large chunk out of the existing owner market that's better for the industry and country.
"The immediate impact on the real estate market in the Bahamas is not going to be positive if it [the Bill] proceeds as is. It will have a severe impact for existing homeowners who will be looked upon to pay this drastic increase in taxation costs if the Bill is passed and becomes legislation.
"There's a lot there in the details, and with this Budget everyone is looking at increased revenue collection. That's not being left on the shoulder of the tax collector; it's being put on the taxpayer."
One realtor, speaking on condition of anonymity, questioned whether the 'six-month' benchmark for 'owner-occupied' status was intended to align real estate with the Bahamas' financial services strategy of encouraging high net worth clients to use this nation as their primary residence/domicile.
The Government has already moved to increase the permanent residency threshold for real estate purchases from $500,000 to $750,000, indicating it wants to attract a higher level of buyers to the Bahamas.
Yet another attorney, in an e-mail seen by Tribune Business, backed the earlier analysis by his colleague in warning that the Real Property Tax Bill "might catastrophically impact sales to high net worth foreigners, and lower property values in the upper ranges since properties will carry a higher cost".
Pointing that the tax rate would rise by 100 per cent above $500,000, they added: "For example, if an owner-occupied property is valued at $5 million, such property would now attract $46,562.50 in annual taxes ($1,562.50 for the first $500,000 + $45,000 for the next $4.5 million).
"In 2019, if the new Bill becomes law, that owner will be paying $93,750 ($3,750 for the first $500,000 + $90,000 for the next $4.5 million). This is basically a 100 per cent increase in real property taxes."