A corporate loan can set off a fatal landmine in housing transactions

For the individual very sad for a person, but a rare case. This is how experts interviewed by HS describe a case where the sale of an apartment did not bring an actual profit, but caused a significant tax penalty.

HS said on Thursday from Helsinki Iris Fräntilän for housing transactions, with which he was ordered to pay more than 10,000 euros in capital gains tax.

Fräntilä lived in the apartment for about a year and a half, and during that time managed to pay off the apartment’s housing association loan. When selling the apartment, Fräntilä added the loan he had paid off to the price of the apartment, and also got it for sale.

Fräntilä did not make a real profit from housing sales.

The tax authorities’ interpretation of the situation was different: the payment of the company loan was not counted as part of the acquisition cost of the apartment, but Fräntilä was considered to have made a profit of around EUR 30,000 in the transaction. So taxes had to be paid on this profit as well.

Fräntilä’s case is quite rare, but it involves many issues related to housing stock companies, which shareholders should know about.

Financial and tax expert of the Finnish Real Estate Association Juho Järvinen says that three simultaneous things were required to create the unpleasant situation.

1. The apartment was lived in for less than two years

Fräntilä sold his apartment after living there for about a year and a half.

According to Finnish tax regulations, an apartment can be sold tax-free if it has been owned for at least two years and the owner of the apartment or a member of his family has lived in the apartment continuously for at least two years during the ownership period.

If Fräntilä had lived in the apartment for more than half a year longer, he would have been saved from the tax penalty.

If you sell the apartment before the two-year condition is fulfilled, you have to pay capital tax on the profit from the sale as usual.

2. It had been decided to generate income from the company loan payments in the housing company

All the two-year residence period would not have been a problem if the housing association had not decided, so to speak, to monetize the payments of the company loan.

In practice, it is about how the housing association handles the consideration or loan installments paid by its shareholders in its accounting.

If the housing association decides to recognize the payments as income, they are calculated as taxable income in the housing association’s income statement. In this case, for example, apartment investors can deduct corporate loan payments from the rental income they receive from the apartment.

Since this tax benefit can be obtained immediately in the income model, the housing association loan payments can no longer be added to the acquisition cost when selling the apartment. If this could be done, the apartment investor would receive a double tax benefit from the payment of the housing association loan.

Often it is possible for building societies to choose an alternative method: the financing of payments. This option also concerns the housing association’s accounting, not, for example, the housing association setting up some kind of investment fund.

Funded payments are treated as tax-free capital investments in the housing company. They are recorded in the housing association’s balance sheet, not in the income statement, and are therefore not considered taxable income of the housing association.

In this case, the payments of the company loan or consideration cannot be deducted from the possible rental income, but they are counted against its acquisition cost when the apartment is sold.

In practice, it is a matter of whether the payment of the company loan or consideration is taken into account in taxation immediately, or only when the apartment is sold.

Real estate investors prefer income because they can own the apartment for decades, and they prefer the tax benefit every year rather than when selling the apartment all at once.

In this case, it would have been more advantageous for Fräntila if the company loan payment had been financed. The payment would have been included in the purchase price of the apartment, and the taxman would not have interpreted it as a profit from the sale.

3. The corporate loan was paid off at the wrong time

The third the factor behind Fräntilä’s difficult situation was the timing of the corporate loan payment.

When it is accepted that he hadn’t lived in the apartment for two years and the housing company had ended up capitalizing on his corporate loan payment, Fräntilä would have had one more chance to avoid the seemingly unfair tax penalty.

According to the tax administration, company loan payments that have been recognized as income can be counted as part of the acquisition cost when the owner of the apartment has paid his housing association loan as a one-time payment either in connection with the purchase or sale of the apartment.

In practice, therefore, Fräntilä could have avoided the tax penalty if he had known that the housing association loan would have been worth paying off only on the last loan repayment day before the sale.

Company loan payments monetization or funding comes up in the public debate from time to time. In many instructions found on the internet, it is stated that the choice of housing association does not really matter for owner-occupiers.

Järvinen and Koro-Kanerva confirm that Fräntilä’s case is exactly the exception where this is not the case.

“If they say no [valinnalla] it doesn’t matter, it is then assumed that the apartment will be lived in for two years”, says Järvinen.

According to the experts interviewed by HS, Fräntilä’s situation is quite rare, as owners often live in the owner-occupied apartment for at least two years.

Fräntilän the incident also raised the question of the activities of the housing company’s property manager. Should a shareholder who was planning to pay off his company loan be warned of a possible tax penalty?

“Of course, someone could have brought it up at every stage, but I wouldn’t bring this up as something that the property manager should always be able to mention,” says Kiinteistöliiton’s Järvinen.

Managing Director of the Land Management Association Mia Koro-Kanerva says that the case has sparked discussion within the union as well.

“Myself, maybe I came to the conclusion that the property manager’s task is not to provide tax advice for an individual shareholder.”

According to Koro-Kanerva, the property manager, on the other hand, should carefully review the consequences of financing or monetization at the general meeting where the matter is decided.

“I bet that quite a few housing associations don’t go through them, because it’s really complicated. But that doesn’t mean the property manager shouldn’t explain it.”