Markets & Finance

Developers see sales softening on 15pc tax


Property developers are bracing for a slowdown in sales of homes as the capital gains tax triples to 15 percent. PHOTO | POOL

Property developers are bracing for a slowdown in sales of homes as the capital gains tax triples to 15 percent.

The change in the rate of tax levied on property transfers follows the coming into effect of the amendment on January 1 and which was carried through the 2022 Finance Act.

According to Stephen Katei, CEO of property consultancy Regent Management, the sale of homes is likely to shrink even as sellers devise ways of absorbing the higher rate of tax on profits from sales.

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“There is a likelihood that the market might shrink because people don’t want to pay more. We might see sellers bringing down the values of homes to push down the size of tax payable on gains downwards,” he said.

“It’s obvious that the taxman wants to raise more but the buyer wants to pay less.”

Developers and real estate firms, which derive their income primarily from buying and selling homes and properties are on their part spared from paying capital gains tax (CGT) as profits from trades comprise ordinary income.

As such, Superior Homes CEO Shiv Arora reckons the impact of a higher rate of tax on capital gains may not be as significant.

“The changes don’t affect developers as much as we pay corporation tax on our profit.

“People will now price in the higher taxation into home valuations. I don’t, however, think that this will significantly impact the amount and value of transactions,” he said.

Property transferred from one party to another through different ways including gifting, inheritance and selling is subject to capital gains tax.

Properties disposed of at less than Sh3 million are, however, exempted from paying the tax along with properties sold to administer the estate of a deceased person or between spouses as part of a divorce settlement.

Capital gains tax is, however, deducted to factor incidental expenses including the cost of advertising to find a buyer and expenses incurred in the valuation of the property and legal fees.

Home and land sales make up Kenya’s real estate sector, which has been thriving in recent decades driven largely by Kenyans’ high affinity for property ownership.

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However, scanty details exist officially as to the magnitude of the sector including the value and volumes of properties sold.

Nevertheless, data from the Kenya National Bureau of Statistics estimate real estate to be 8.9 percent of the gross domestic product as of the end of 2021 and has grown by an average of 9.2 percent in the last five years.

This makes the real estate sector to be bigger than legacy sectors including manufacturing, finance, insurance and construction.

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