What is the Improvement Deduction and Tax Appraisal?
The “fiscal appraisal” refers to the valuation carried out by a government entity, generally the fiscal or tax authority of a country, on the value of a real estate property for the purpose of determining the taxes to be paid, this appraisal is used as a basis for calculate taxes such as property tax or real estate.
The “improvement deduction” refers to the possibility of subtracting certain expenses or investments made in improvements to the property when calculating the property tax or the tax base for other taxes, since the improvements may include constructions, renovations or additions that increase the value of the real estate, the improvements deduction allows the owner to reduce the tax base by considering the value he has added to the property through these improvements.
So, when a tax appraisal is carried out, the improvements deduction allows the owner to reduce the taxable value of his property by taking into account the investments made to improve it, this can have a positive impact on the taxes payable, however, the Specific rules on the improvement deduction may vary by jurisdiction and local tax laws.
In relation to the provision of article 121, section II of the Law, if the seller cannot justify the cost of the investments made in constructions, improvements and extensions of the property, the value indicated in the notice of completion of work will be taken as the cost, in case said notice specifies the proportion of the value of the investments in constructions, improvements and expansions of the property assigned to the land and construction, the taxpayer must consider only the value corresponding to the construction as a cost.
As we mentioned, tax entities have the power to request, carry out or consider the valuation of investments associated with the aforementioned concepts, taking as reference the date of completion of the constructions, improvements and extensions of the property, and in the event that the value resulting from the valuation is lower by more than 10% Compared to the figure indicated in the notice of completion of the work, the valuation amount will be considered the cost of the investments.
Only in situations where taxpayers No can justify the cost of investments made in construction, improvements and extensions of a property for any reason, they are allowed to consider the 80% of the value of the buildings according to the appraise corresponding, which must be carried out taking as reference the date of completion of said investments. In addition, the age indicated in the aforementioned appraisal must be taken into account.
In which cases is it necessary to carry out an appraisal for the Improvement Deduction?
The need to perform a tax appraisal may arise in a variety of situations, and may depend on the specific laws and regulations of each jurisdiction.
Some common circumstances in which a tax appraisal may be necessary include:
- Transfer of Ownership: When ownership of real estate is transferred, whether through a sale, purchase, inheritance, donation or other type of transaction, it may be necessary to carry out a tax appraisal. This appraisal is used to determine the value of the property and calculate the associated taxes, such as the Real Estate Acquisition Tax (ISAI) or the Property Transfer Tax.
- Determination of Property Tax: In some places, the tax appraisal is used to establish the tax base of the property tax, this may involve periodic review of property appraisals to adjust tax values according to real estate market conditions.
- Tax deduction: For income tax deduction purposes, homeowners may need tax appraisals to calculate depreciation on their properties or to document deductible improvements made.
- Revaluation of Assets for Accounting Purposes: Companies often perform tax valuations as part of their accounting practices to determine the value of assets, especially real estate, and accurately reflect the company's financial condition.
- Expropriation or Disappropriation: In cases where the government acquires ownership of an asset for reasons of public utility, it may be necessary to perform a tax appraisal to determine the fair compensation that should be paid to the owner.
How to make an Improvement Deduction Appraisal?
Hire a Professional
- It is advisable to hire an expert appraiser or appraiser with experience in real estate appraisals; these professionals have the necessary technical knowledge and training.
- Provide the estimator with all relevant information about the improvements made, including plans, construction permits, invoices and details about the materials used.
- Establish the date of execution of the improvements: Identifying the date on which the improvements were carried out is crucial to evaluate their depreciation, since those carried out more recently tend to have a higher value compared to the older ones.
- Property Inspection: The expert will carry out a detailed inspection of the property to evaluate the quality and scope of the improvements, which may include aspects such as the structure, finishes, electrical and plumbing systems, among others.
- Identify the improvements made: Prepare a detailed list of the improvements made to the property, such as bathroom or kitchen renovations, installation of new floors, construction of terraces, among others.
- Calculate depreciation: The term “depreciation” denotes the decrease in value of an improvement over time, you can calculate depreciation using an industry standard formula, generally in the range of 1.5% to 2% annually.
- Determine the original cost of the improvements: Calculating the original cost of the improvements involves considering associated expenses, such as labor, materials, and other costs related to the improvement.
- Calculate the present value of the improvements: To determine the present value of the improvements, subtract the accumulated depreciation from the original cost of the improvements.
Comparison with Similar Properties
- The property's features and improvements will be compared to other similar properties in the area, this helps establish a benchmark to determine the value of the improvements.
Includes the value of improvements in the sales price
- You can incorporate the value of the improvements into the sales price of the property, which could result in a lower tax burden.
- The expert will conduct an analysis of the real estate market to determine how improvements affect the value of the property in that specific context.
Use Appraisal Methods
- Different valuation methods can be used, such as the comparative market method, the cost method and the income method (if applicable). The method chosen will depend on the nature of the improvements and the characteristics of the market.
Document the Appraisal
- The expert will document the appraisal in a detailed report that will include the methodology used, the factors considered and the value assigned to the improvements.
What is a Tax Appraisal for?
Tax Appraisals play a fundamental role in determining the Acquisition Tax (ISAI) and income tax (ISR). It can be understood that these appraisals, by measuring the physical value of real estate, are used to calculate the tax lien or the corresponding deduction, depending on the situation, they are valuable tools for both tax authorities and individual users.
When the sale of real estate is made, the mandatory payment of ISR is incurred and in accordance with the article 205 of the ISR law, it is possible to deduct investment expenses related to the real estate, which can reduce the amount of tax payable on the sale.
In the case of investments in improvements to a property, it is necessary to calculate the cost of the investments made through these improvements and extensions, the value opinion in the notice of completion of work must reflect the total cost, as established in the article 121, section II of the ISR law.
The tax authorities may consider the appraisal as part of the costs of the investments, especially when its value is more than 10% lower than the value of the investment indicated in the notice of completion of work as mentioned above.
Who can carry out a Tax Appraisal?
Tax appraisals are usually carried out by expert appraisers or appraisers duly authorized and registered by the competent authorities, such as the SEP, these professionals have the necessary training and experience to carry out accurate and objective valuations of real estate, in accordance with established regulations and methodologies.
In many countries, government institutions, such as tax or valuation authorities, may have lists of authorized valuation experts. It is also common for there to be private entities specialized in valuation services that have professionals trained to carry out tax valuations.