Tax Exemption for 3-Year Rental Agreements

EghtesadOnline: Landlords willing to sign three-year lease contracts will be granted exemption from vacancy tax and other slated tax measures concerning the housing sector, a senior official with the Ministry of Roads and Urban Development said.

News ID: ۷۵۰۴۵۶

18 July 2020

“What's more, landlords who offer their rental property for lease before Sept. 21 will be eligible for vacancy tax exemption,” Parvaneh Aslani was also quoted as saying by IRNA.

According to the official, there is a strong possibility that the housing sale and rental markets would achieve equilibrium through these incentives.

The Iranian Parliament voted for the outlines of an updated version of its own vacancy tax as per Article 54 of Direct Tax Code, which was approved in the Iranian year ending March 2016, as a way to increase the supply of housing for rent or sale as opposed to making capital investments.

“Details of the proposal are expected to be discussed in the parliament this week,” Ehsan Khandouzi, a lawmaker, told Fars News Agency.

“The nationwide online database of all residential properties across the country will be completed and put at the disposal of Iranian National Tax Administration,” Deputy Roads Minister Mahmoud Mahmoudzadeh said last month. “In so doing, INTA will be able to mine the database to track vacant homes subject to Vacancy Tax in less than two weeks.”

Echoing the same remarks, INTA Chief Omid Ali Parsa said his administration will start enforcement of vacancy tax as soon as the ministry finishes its assignment.

“Empty homes will not be taxed in the first year but they will be subject to tax at the rate of 50% of a property’s assessed rent in the second year and in the third year, they will be levied tax at the rate of 100% of property’s assessed rent. A commission comprised of officials with the Roads and Urban Development Ministry, INTA and Municipalities Organization will estimate the rent of the properties.”

However, he believes that these rates and penalties are not high enough to work as a powerful deterrent to ensure all houses are made available.

According to Mahmoudzadeh, a total of 6.6 million households or 30.7% of the country’s 18.1 million urban households in the country live in rented homes.

More than 2.1 million homes in urban areas are empty and there are about two million second homes.

Vacancy tax is among a series of measures the government is taking to help tenants face-off exorbitant price rises.

Security Deposit Loans

The government will allocate a fraction of the 750-trillion-rial ($3.13 billion) coronavirus bailout to renters, says Minister of Roads and Urban Development Mohammad Eslami.

The interest-only security deposit loans, in which the renters pay only the interest costs and not the principal, will be paid to landlords.

“Renters of homes with an area of less than 75 square meters in Tehran and 90 square meters in other cities will qualify for this type of facility. An official contract needs to be finalized between the landlord and renter before banks can begin the lending process,” he was quoted as saying by Mehr News Agency.

Mohammad Hassan Moradi, an official with Bank Maskan, the state agent bank of the housing sector, says in view of the resources, there will be a limit on the number of loans provided by the creditor.

Moradi added that financial resources needed to carry out this program must be provided through deposits.

“Bank Maskan believes that security deposit loans can be offered in the form of Qarzol-Hassaneh loans [interest-free microcredit], interest-only security deposit loans or security deposit loans that require both principal and interest repayments. However, the Central Bank of Iran has yet to approve the type of such hypothetical loans,” he was quoted as saying by ILNA.

Rent Increases Capped

Tenancy agreements signed as of June 29 may not increase rents by more than 25% in Tehran, 20% in large cities with a population over 1 million such as Mashhad, Isfahan, Tabriz, Ahvaz, Qom, Shiraz and Karaj, and 15% in other Iranian cities, Mahmoudzadeh said.

The new guideline approved by the National Taskforce to Fight Coronavirus also suspends landlords' ability to forfeit a lease during the time the country is battling the health crisis plus three months after the Health Ministry declares the end of the outbreak.

There are some exceptions to the rule, the deputy minister added.

“The tenant must have delivered on their commitments during their tenancy term; in other words, they should not be recognized as a tenant in arrears by the judiciary. Moreover, those who have caused financial losses for the landlord won’t be entitled to the new incentive,” he said.

“Once the landlord legally sells their property during the lease period, the tenant must move out within two months. The final exception is when the tenant refuses to accept the aforementioned legal rent increase. If the landlord asks for a higher rent [than what was approved], the tenant can fail to pay the rent without facing eviction action.”

Asked if the new measure is legally enforceable, the deputy minister said, “Not a single judicial authority is allowed to order the tenant to vacate the premises, as per the new legislation. This is a decision made by the Supreme National Security Council of the Islamic Republic of Iran and it goes beyond the jurisdiction of the Iranian Parliament. It does not violate either the rights of the landlords or tenants. Rather, it will soothe the sentiments of the rental market, particularly in large cities.”

Mahmoudzadeh noted that all residential estate deals, including home sale, rental and lease agreements, are required to be registered at the state-run Tenement Management Information System operated by the Ministry of Roads and Urban Development and should have received tracking code as of June 29, IRNA reported.

In early May, the taskforce approved a self-executing two-month extension of rental agreements with the termination date falling between February 20 and May 20 to control the spread of coronavirus and help tenants battling job and income losses during the pandemic.

Latest Reports on Tenancy Market

Latest data published by Central Bank of Iran on its website show during the third month of the current fiscal year (May 21-June 20), the price of rented residential properties in Tehran and across urban areas increased by 27.6% and 30.7% respectively compared with the similar month of last year.

According to the Statistical Center of Iran, the average Consumer Price Index for rents in urban areas during the four-quarter period to June 20, which marks the end of the first quarter of the current fiscal year (spring), increased by 22.7% compared with the corresponding period of last year.

SCI had put the annual inflation rate for the preceding quarter, which ended on March 19, 2020, (last year' Q4 in winter) at 23.2%.

The highest and lowest average annual inflation rates were registered for Lorestan and West Azarbaijan provinces with 35.8% and 9.5% respectively.

According to the SCI report, CPI for rent levels in urban areas (using the Iranian year to March 2017 as the base year) stood at 175.1 in spring, indicating a 3.4% increase compared with the previous quarter.

SCI had put the quarter-on-quarter rent inflation rate for the preceding quarter, which ended on March 19, at 4%.

Ilam and Lorestan provinces registered the highest and lowest quarter-on-quarter inflation rates for tenants in urban areas with 9.1% and 0.7% respectively.

The consumer rent price index in urban areas increased by 23.3% in Q1 over the same quarter of last year.

SCI had put the year-on-year rent inflation rate for the preceding quarter, which ended on March 19, at 22.9%.

The highest and lowest inflation rates on a year-on-year basis in the first quarter of the current year were posted by Lorestan with 35.8% and West Azarbaijan with 7.5%.