New, but also old, rules for tax deferral at the sale of private residences

The Government has now presented its proposal for changed deferment rules. The ceiling amount on deferment is no longer to apply and a person purchasing a less expensive residence can be granted a higher deferral than currently.

As previously reported on in Tax matters, the Government wants to eliminate the ceiling on deferment deductions at the sale of private residences. A proposal has now been presented to the Parliament.

According to current regulations, there is a limit on the deferment amount, when selling a residence, of SEK 1.45 million, per residence. This ceiling is proposed to be eliminated on sales taking place between 21 June 2016 - 30 June 2020.

In addition, the proposal includes a change in the method of calculating the deferment amount which can be important when one purchases a less expensive residence. This change would also apply to sales as from 21 June 2016, however, without a time limit. This change means that the quota rules which were previously in place would be re-introduced. We provide an example below:

Example

A sells a private residence for SEK 2,500,000 and makes a profit of SEK 1,200,000. A purchases a replacement residence for SEK 1,500,000. There is a previous deferment amount of SEK 500,000 on a former residence.

Calculation of the maximum deferment according to the new rules

Applying the proposed new rules, the deferment deduction would be calculated as follows.

Maximum deferment deduction = (Profit + Previous deferment) x (Price of purchased resident/Price of sold residence)

1,020,000 = (1,200,000 + 500,000) x (1,500,000/2,500,000)

Calculation of the deferment according to the current rules

Applying the current rules, the deferment deduction would be calculated as follows.

Maximum deferment deduction = Profit + Previous deferment – Price of sold resident + Price of purchased residence

700,000 = 1,200,000 + 500,000 – 2,500,000 + 1,500,000

As can be seen, the current rules provide, in this example, a deferment of a maximum of SEK 700,000 while the proposed rules make possible a deferment amount of SEK 1,020,000.

Comments

A person selling their residence at some point during the period 21 June 2016 - 30 June 2020 and receiving a deferment greater than MSEK 1.45 may retain the deferment also after 30 June 2020.

The proposed quota rule for calculating the deferment deduction often leads to a higher deferral amount than with the current rules. However, in certain situations the quota rule can lead to a lower amount. Consequently, for sales up to and including 31 December 2016, the current rules will be applied, on the first hand, unless one makes a claim for the new rules to apply.

Taxation on a standardised basis of deferment remains without any changes. This means that 1.67 percent of the deferment amount must be reported as income from capital on an annual basis which is taxed at 30 percent income tax. In other words, the deferment costs 0.5 percent (=30 percent*1,67 percent) per year in tax, which can be a rather high cost as compared to the current mortgage interest rates in Sweden. An option exists to request reconsideration of previously granted deferments, which could result in a refund; see previous posting in Tax matters. More information can be found on the Tax Agency’s home page.

Author: Kristian Gustavson, former employee at PwC.