Wednesday, July 11, 2018
DONALD Trump wants a wall to keep foreigners out. The Bahamas didn’t have to build a wall. All the government had to do was create a high enough rate for real property tax for residences owner-occupied for less than six months of the year and they could not only effectively keep those who might have been interested in a second home from choosing The Bahamas, they could entice those already invested in second homes to pack up and leave.
Donald Trump was at least honest about keeping America for Americans (ignoring the fact that there are few native Americans living in America and everyone else came from somewhere else). The American president said his battle is not with foreigners but with those who try to enter the country illegally.
Our government’s battle seems to be with those who not only reside here part-time legally, but were lured to do so and paid handsomely for the privilege. Yet with one single change in the 2018-2019 Budget, The Bahamas all but gave the boot to those high net worth individuals invited to make The Bahamas their second home by every successive government since 1992.
Maybe the change was not thoroughly thought through. Maybe the consequences were unintentional but it only took hours after the budget with the change in real property tax announcement that e-mails began to fly. While some said it must have been a mistake, others said they were putting their houses on the market immediately. One family’s property tax bill for an island they own was going to go from $50,000 to $400,000. The gentleman was willing to take a loss on the sale of his residence rather than incur a bill like that annually. He could live anywhere and as much as he likes The Bahamas for the short weeks of the year he lives here, he does not enjoy it nearly half a million dollars’ worth for property tax every year.
The changes to real property tax in the budget were intended to raise additional revenue, a goal everyone understands. But aiming the revenue gun at the wealthy does not force them to produce more money, it sends them running the other way if the increases are seen as too onerous, unjust or unreasonable.
In brief, here is what happened with property tax. There was an extension of breaks for those striving for their first home or a residence valued at $500,000 or less and that is a very good thing. Home ownership builds empowerment, responsibility, stability and is an undervalued contributor to the overall economy. That is the good news part of the real estate section of the budget.
The concern lies in two other areas, the ability of developers to claim input on their VAT, which appears to be under re-consideration, which is also good. If they cannot claim back the VAT on materials used, the buyer ends up paying double taxation because there is VAT on components of the sale. There is also concern about what impact the VAT increase which applies to legal fees and real estate commissions will have and whether by driving the already high closing costs up even higher that will affect market volume. The Bahamas Real Estate Association (BREA) is concerned about anything that increases costs, particularly in a market that is just beginning to recover from both a global recession and contraction of bank lending. BREA is especially concerned – and rightly so – about the immediacy of the change, meaning it could impact contracts for sale and purchase that have already been signed with closings pending. The 700-member BREA is optimistic that it will meet with Deputy Prime Minister and Minister of Finance Peter Turnquest and the issue of pending sales will be amicably resolved.
But the changes with the greatest impact are the removal of a $50,000 a year cap on real property tax and an increase from 1% to 2% (above the $500,000 level) for all property that falls under a category called “other,” meaning it is not owner-occupied for six months of the year. That is the equivalent of charging commercial real property tax, a financial penalty for someone who spends less than six months of the year in residence.
The triple whammy of requiring 6-month residency to avoid a tax hike from 1% to 2% of the value of the property and removing the cap is the equivalent of our keep out wall for high net worth individuals. If the feeling was “They’re rich, we need the money and they can afford it,” prevailed, it reflected a dismal understanding of the market. Wealthy individuals can go anywhere. They do not want rules changed in the middle of the game nor do they want to feel they are being taken advantage of. They also watch their money and invest where it makes sense. The Bahamas has a lot of competition, including our number one competitor, Florida, which is inviting residents of means to the state and offering incentives plus far more reliable and extensive services.
Someone who has a $10 million property and paid $50,000 last year and spends six weeks here this year is not going to want to write a cheque for nearly $200,000 because the government says he or she is rich. E-mails are already flying fast and furious with people threatening to sell before the market is flooded. This is serious business that the decision-makers could simply not have thought through. And it is one more example of why consultation on individual policies is so important.
Most high net worth individuals who own in The Bahamas do not spend six months in the country, yet their economic contributions are significant. They spend handsomely when they are here and even when they are not and they demand little in the way of services from government. This debacle must be fixed before the country’s reputation is endangered and there is no telling how long it will take to get it back.