5% VAT for residential properties up to 140,000 €. How is it applied?

GOOD NEWS FOR THOSE WAITING FOR THE PUBLICATION OF THIS LAW! Starting on January 1, 2021, a 5% VAT applies to residential properties up to €140,000. The new law was promulgated by President Klaus Iohannis and published in the Official Gazette No. 1079 of November 13, 2020.

WHAT ARE THE CONDITIONS TO BENEFIT FROM THE REDUCED VAT? The 5% VAT threshold for residential properties has been increased from 450,000 Lei to €140,000, equivalent in Lei. To benefit from the reduced VAT, the condition of a maximum usable area of 120 sqm, excluding annexes and dependencies, remains. Only individuals, not legal entities, can benefit from the 5% VAT.

In addition, it is no longer necessary to make a self-declaration attesting that you have not previously benefited from this reduced VAT. You have the right to purchase as many such properties with 5% VAT as long as the aforementioned conditions are met.

There is also no longer a condition of a maximum land area, owned or undivided share. In the past, it was 250 sqm, but this limitation was abolished some time ago.

Keep in mind that for a property to be eligible for the reduced VAT, it must be habitable. The housing law states that the minimum requirements for a residence are:

• Individual free access to the living space, without disturbing the possession and exclusive use of the space held by another person or family;
• Resting space;
• Space for food preparation;
• Sanitary group;
• Access to electricity and drinking water, controlled evacuation of wastewater and household waste.

If you choose to buy properties under construction, the 5% VAT will apply to the down payment from the preliminary contract. If you have already signed a preliminary contract with the standard VAT, at the signing of the final contract (after January 1, 2021), the adjustment of this VAT will be made to apply the reduced rate.

WHO BENEFITS FROM THIS NEW THRESHOLD FOR REDUCED VAT? Everyone benefits: both customers and developers, but also the economy in general.

Developers will sell their inventory of units more quickly and easily within this price range and will be motivated to invest in additional facilities for the end customers to make them happier.

Customers benefit because prices will be lower by the difference in VAT for the price range of €100,000 to €140,000. They also have access to higher quality properties and more facilities.

Economically speaking, it is a good measure because it creates horizontal growth in several industries related to real estate, namely construction, furniture manufacturing, and appliances.

WHAT ARE THE IMPLICATIONS OF THIS LAW? There will be an increase in demand for short-term housing, which will favor the increase of prices.

Not only that, but it will also attract a medium-term increase in net housing prices (without VAT) towards the new threshold. Properties currently at €120,000 will eventually become €140,000 and will pull cheaper properties along with them, in cascade.

Also, more real estate developments in the upper-medium price range will be launched, so more jobs will be created in the industry, putting more pressure on the workforce.

The effect of this? Over time, salaries in the construction sector will increase again, and overall construction costs will also rise, which will be reflected in prices.

If you have any questions about VAT or how it applies, write to us on social media and we will answer you. And if you want to find a good selection of new properties that fit into this 5% VAT, browse the options on our website or contact our colleagues by calling 0727.722.222.