By NEIL HARTNELL
Tribune Business Editor
Family Island realtors are warning that Real Property Tax Act changes will be such "a breaking point" for many second homeowners that it threatens their economies' very "basis of survival".
James Rees, a broker with Abaco Island Properties (Bahamas), told Tribune Business that the tax hikes introduced by the changed definition of "owner-occupied property" would likely exacerbate the damage caused by last year's "crazy" jump in property tax valuations for many on the island.
Describing the "owner-occupied property" change as "huge", Mr Rees said it would affect many of Abaco's Canadian second homeowners because they have to spend at more than six months in their home country as a condition of being able to access public healthcare services.
The Real Property Tax Amendment Bill, which accompanied the 2018-2019 budget, requires "owner-occupiers" to reside in their homes for six months or more per year. This is a marked change from the current Act, which 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.
The Bill, though, proposes to eliminate the term "seasonal basis", meaning 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, their properties face being reclassified as "residential property" or "other property". Since non-Bahamians cannot qualify for the former, foreign second homeowners will fall into the 'other property' category where the tax rates are much steeper.
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, meaning the the tax rate is effectively doubling.
"That's going to be huge," Mr Rees told Tribune Business of the tax increase's likely impact. "I think it's a bad move for the Bahamas. We've just come out of a real estate recession, so to speak, and it's been longer than in the US.
"The last two years have seen an improvement, it's been steady, and for something like this to come into play is going to affect the Out Islands more than Nassau."
While some have been dismissive about the likely effects, arguing that foreign investors should be taxed just as heavily as Bahamians following the 60 per cent VAT rate hike to 12 per cent, the second home market is often the key driver for real estate and other activities in Family Island economies such as Abaco.
Mr Rees pointed out that second homeowners "support the entire spectrum of services" in Abaco, hiring maids, gardeners, caretakers, handymen and the likes of air conditioning repairmen. This, he argued, had a wider 'trickle down' impact for the economy than hotels, who usually performed such services 'in-house'.
"It is the basis of survival in Abaco, the second homeowner, and you're driving them away," Mr Rees warned of the Bill's reforms. "You've done damage with the tax last year. I think it will probably be a breaking point.
"There's a lot of wealthy people here that it will not affect, but a lot of people that come here for five months in a year, if you remove that [owner-occupied status] then a lot of them are going to say it's too much; this is it, and we just have to sell and get out.
"Once you get a lot of real estate coming on to the market the volumes fall, they sell for less and the tax revenues go down as the values are less. Who's going to come in and suck up these properties? They're not going to do it. All the middle class people who worked all their lives, and want a place to go to in winter, they're not going to do that."
Mr Rees was backed by Abaco-based attorney, Frederik Gottlieb, who yesterday told Tribune Business that the "constant changes in law and policy" related to real estate and taxation were starting to unnerve foreign investors.
"I've looked at it," he said of the Real Property Tax Act changes, "and have a preliminary impression it's not going to be good for Abaco and the second homeowner market, and I think it will have a negative impact."
Mr Gottlieb said he had yet to consider all the implications, but added: "My only comment at this time is why amend or change something that doesn't need amending. It's been quite well the way it's set up.
"For a lot of foreign investors, certainly the ones I've spoken to, they're becoming a little concerned by the constant change in policy and laws. It creates a degree of uncertainty that is never very good to attracting foreign direct investment."
Mr Gottlieb described Abaco's economy as "really based" on the second home market, and recalled previous occasions when he had urged the Government not to tinker with it given the economic activity and employment it generated.
"I recommended they leave it well alone, and it was left well alone," he said. "Abaco continued to grow, expand and provide tremendous revenues for the Government. I don't know why they want to tamper with something that's working so well.
"I do fully understand the present administration finds itself in a tough situation as regards the fiscal affairs and economy of the country, but at times it's best to consult a bit more because raising taxes does not necessarily translate into more revenue."
Mr Gottlieb said he was referring to real property tax, rather than the VAT increase, with the latter statement, especially given that the Bahamas was seeking to attract increased foreign direct investment (FDI). "I would tread very carefully not to disturb that," the former FNM MP said.
"I understand the Government has to do what it has to do to arrest the bad situation it inherited, and I do support the Government in all its policy decisions."
Concerns over the Real Property Tax Act change are not confined to Abaco. Pedro Rolle, the Exuma Chamber of Commerce's president and a realtor by profession, said the 'owner-occupied' amendment - combined with the VAT increase - was "too much to digest in one fell swoop".
"It's going to be significant," he added of the change. "That puts the majority of the second homeowners out of the 'owner-occupied' category and straight into the 'investment' category where those homes are going to be considered investments or income-producing.
"I don't know what the full impact is, but we can surmise it's going to be significant... I think we're going to see a lot of these properties undoubtedly going on the market and, because so many are going on the market, it's going to impact the values. Human nature says that's going to happen."
Mr Rolle said much of Exuma's economic revival had been driven by real estate and the second home market, and he added: "If real estate is depressed for any reason that trickle down goes out of Exuma's economy.
"We'll have less properties being purchased, less buildings being built, and every sector of our economy being impacted. I'm not very optimistic about the impact of this Budget on Exuma, either from a VAT point of view or how it impacts on foreign investment. When you combine these negatives it's too much in one fell swoop."