The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Realtors yesterday warned that an increasing number of property deals are being put “in jeopardy” by the Department of Inland Revenue (DIR) challenging the sales price on which VAT is calculated.

Carla Sweeting, the Bahamas Real Estate Association’s (BREA) president, told Tribune Business that “you hold your breath every time there is a sale” and hope the tax authorities accept the price stated on the conveyance without question and do not demand higher VAT payments.

She described the situation, which has been a long-standing issue for the real estate industry, as “very concerning” with several realtors suggesting the problems are only growing worse and resulting in increased costs, uncertainty and delays in closing sales that are a key driver of both economic activity and government revenues.

However, Dexter Fernander, the Department of Inland Revenue’s operations manager, last night voiced surprise at the industry’s concerns as - in his experience - “objections” to the tax authority’s assessment of the VAT payable on real estate sales have lessened in recent months.

Disclosing that the Department only queries a sales price if it is more than 15 percent lower, or higher, than the valuation assigned to that particular property for real property tax purposes, he added that it is not the agency’s intent to “halt or stop” the real estate market or private commerce.

And, conceding that the Department of Inland Revenue is “not perfect”, he urged realtors, attorneys and their clients to provide legitimate evidence to challenge its valuations such as the comparative values for similar properties in the same neighbourhood and construction costs.

Ms Sweeting, though, revealed that she and other BREA directors recently met with senior Department of Inland Revenue officials in a bid to resolve both sides’ concerns over issues that include the latter’s challenges to sales prices stipulated on conveyances submitted for stamping, recording and due payment of VAT to the Public Treasury.

Timothy Smith, partner at Better Homes & Gardens Real Estate MCR Bahamas, told Tribune Business: “I’ve seen that quite often. It was shocking to me that they were taking that stance.” He added that the tax authorities have, this year, increasingly taken the position that if “the [property tax] valuation is higher than the purchase purchase price you’re expected to pay on the higher of the two values.

“I’ve had that happen probably three to four times’ this year,” Mr Smith said. “You can challenge it. I’ve had situations where it was challenged and reduced, but I’ve seen a lot of scenarios where they are trying to charge buyers on the higher of the two valuations.

“It puts deals in jeopardy. A lot of people were not informed. We are starting to see people get informed from the outset. Now we’re having to check real property tax bills before they go so sign the sales agreement because we want to make sure the valuation is not higher than the purchase price.

“If we find out at the end of the deal, buyers are like: ‘That’s crazy’.” And, until the Department of Inland Revenue accepts the VAT payment, conveyances cannot be stamped, recorded and lodged in the Registry of Records, creating further closing problems if mortgage financing is involved because the lender’s security is not perfected until this happens.

Ms Sweeting, BREA’s president, told Tribune Business: “It is a problem. In fact, I met with various persons at the Department of Inland Revenue along with a few of my directors a few weeks ago to address certain issues with them. One of the issues was this.

“Their argument is they’re saying that they’re saying they have a lack of information to guide them on whether a conveyance is accurate or not. I don’t buy that. If an attorney handles a transaction and submits it for payment, they have to provide the sales agreement.

“If you suspect the attorney is fixing the sales agreement to avoid paying the full amount of tax, it has to be dealt with, but you cannot make everyone suffer. You cannot punish the whole class for one child,” the BREA president added. 

“Let’s use West Ridge. If you have an acre of property, a 4,000 square foot home on it with pool and cottage, and you say it’s been sold for $400,000, that’s a red flag because we know that’s not accurate. We explained to them that we cannot give them access to the Multiple Listing System (MLS) for legal reasons, but you should have people in the business who know what certain areas are going for.”

Ms Sweeting added that, in the current “seller’s market”, sales prices “shouldn’t be too far off” the values properties were appraised at for real property tax purposes. However, she said there are numerous factors that might influence persons to sell for prices at below-market value, such as the need to raise liquid cash quickly to cover costs associated with a medical emergency.

“Why should they be penalised for that?” the BREA president asked. “If that’s the case, get clarification on that. They [the Department of Inland Revenue] made it very clear to us that they are not about regulation; they are about collecting money....

“It’s very concerning, because we hold our breath every time there is a sale. I don’t understand why they want to make life more complicated, and make citizens more upset. Just make it simple. They’re so desperate for money and I don’t know why.”

Mr Fernander, though, said the Department of Inland Revenue “needs some clarity if there is a drastic difference in value” as a result of the sales price being 15 percent lower, or higher, than a property’s appraised value for real property tax purposes. Another warning sign, he added, was if the conveyance value did not align with comparative property prices for the same neighbourhood.

“What we see is that some are questionable on the neighbourhood comparatives,” Mr Fernander explained. “We don’t know if these are fire sales, but the values coming in are not in comparison with the comparatives the Department of Inland Revenue has. There are difficulties on that end with accepting the value.

“There’s a need for education for what is fair market value versus the sales price. Realtors needs to better educate their clients on the transaction to make that transition easy. Every property has an assessment number and valuation, so they will know the [sales] valuation is off before they advise the client. If it goes beyond our benchmark, we have to question what is causing it.”

However, Mr Fernander voiced surprise that realtors are expressing concerns now. “We’ve not having that much challenges, and are not seeing that many inquiries or objections to the values coming through. We know we’re not perfect. Our values might be questionable, but you need to present to us comparatives that are stamped and registered.

“You cannot bring comparatives on transactions that have not gone through; that have not been stamped and registered. Be truthful in declarations. You cannot say this is vacant land and we do a simple Google Earth search and there’s a structure on that property.”

The Department of Inland Revenue’s operations chief said that, besides having access to records on all stamped and approved mortgages, it can also cross-check sales prices with the construction values/costs that were submitted to the Ministry of Works to obtain occupancy certificates.

“We know realtors stimulate growth in the economy. It’s not for us to halt or stop that,” he told Tribune Business. “Our values may be off. We have an inquiry form that you can present as to why you feel they are not right, and going forward we can adjust and review the rates. We are not penalising any one person.

“We’re not always right. We know we make mistakes. We might have the wrong rates. The price of construction we have for certain areas might be off. Maybe our information is off. Show us, and we will meet in a median place. When they are above or below the benchmark, either they are off or we are off. We have a problem and have to figure out why there is a difference.”

However, several realtors speaking on condition of anonymity affirmed that the Department of Inland Revenue’s stance is disrupting the market’s ease of doing business. They added that it threatens to have “a domino effect” because, if sales are lost due to delays and/or demands for a higher than expected VAT payment, multiple industries lose out while the Government misses valuable revenue.

One said potential sales could go “stale”, with realtors and attorneys among those missing out on income generated by real estate transactions as well as other industries that serve residential households. “The industry could die a slow death if we’re not careful,” they added, “when it is doing well and supporting the country. 

“I’m not sure it’s reached that point yet, but the Department of Inland Revenue don’t need to operate like that when it comes to the ease of doing business in The Bahamas. It’s not good business practice. We should have a red carpet approach to investors.

“Why have that posture, and all they have to do is ask for proof. Where did the trust go? We’re a regulated industry, have a code of ethics, rely on data have the MLS. We have a history of sales, what has happened. We need to address that and stop that. That’s what we’re after.”

Another realtor said bluntly: “It’s a disaster zone, a total disaster zone. They’ll [the Department of Inland Revenue] look at some listing someone has for property in the same neighbourhood and, say it’s for $500,000, will say your property must be worth the same.

“The listing price doesn’t mean it’s the same as the sales price, and they don’t know that they’re comparing apples with oranges. It’s a mess, a total mess, and they take forever to get back to you and argue over stuff. I don’t know where they get their numbers from. It just slows everything up. Generally I now expect a transaction to take up to six months to close.”