An Overview Of Real Estate Taxation In Nigeria -By Kennedy Iwundu (PhD)

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TABLE OF CONTENTS

 

Pages

  1. REAL ESTATE & TYPES 3-8
  2. THE CONCEPT OF TAXATION 9-12
  3. REAL ESTATE TAXATION 13-20
  4. TAXES INVOLVED IN REAL ESTATE IN NIGERI 21-52
  5. CONCLUSION & RECOMMENDATIONS 53-54
  6. REFERENCE
  1. REAL ESTATE AND TYPES

What is real estate?

Real estate is defined as the land and any permanent structures, like a home, or improvements attached to the land, whether natural or man-made.


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Real estate is a form of real property. It differs from personal property, which is not permanently attached to the land, such as vehicles, boats, jewelry, furniture, and farm equipment.

Key Takeaways

Real estate is considered real property that includes land and anything permanently attached to it or built on it, whether natural or man-made.

There are five main categories of real estate which include residential, commercial, industrial, raw land, and special use.

Investing in real estate includes purchasing a home, rental property, or land.

Indirect investment in real estate can be made via REITs or through pooled real estate investment.

The terms land, real estate, and real property are often used interchangeably, but there are distinctions.

Land refers to the earth’s surface down to the center of the earth and upward to the airspace above, including the trees, minerals, and water. The physical characteristics of land include its immobility, indestructibility, and uniqueness, where each parcel of land differs geographically.

Real estate encompasses the land, plus any permanent man-made additions, such as houses and other buildings. Any additions or changes to the land that affects the property’s value are called an improvement.

Once land is improved, the total capital and labor used to build the improvement represent a sizable fixed investment. Though a building can be razed, improvements like drainage, electricity, water and sewer systems tend to be permanent.

Real property includes the land and additions to the land plus the rights inherent to its ownership and usage.

Types of Real Estate

Residential real estate: Any property used for residential purposes. Examples include single-family homes, condos, cooperatives, duplexes, townhouses, and multifamily residences.

Commercial real estate: Any property used exclusively for business purposes, such as apartment complexes, gas stations, grocery stores, hospitals, hotels, offices, parking facilities, restaurants, shopping centers, stores, and theaters.

Industrial real estate: Any property used for manufacturing, production, distribution, storage, and research and development.

Land: Includes undeveloped property, vacant land, and agricultural lands such as farms, orchards, ranches, and timberland.

Special purpose: Property used by the public, such as cemeteries, government buildings, libraries, parks, places of worship, and schools.

  1.  THE CONCEPTS OF TAXATION

What Is Taxation?

Taxation is compulsory levies imposed on individuals and cooperate entities with the primary objective of raising revenue for government.

Taxation is a term for when a taxing authority, usually a government, levies or imposes a financial obligation on its citizens or residents. Paying taxes to governments or officials has been a mainstay of civilization since ancient times.

 

The term “taxation” applies to all types of involuntary levies, from income to capital gains to estate taxes. Though taxation can be a noun or verb, it is usually referred to as an act; the resulting revenue is usually called “taxes.‚Äú

Key Takeaways

Taxation occurs when a government or other authority requires that a fee be paid by citizens and corporations, to that authority.

The fee is involuntary, and as opposed to other payments, not linked to any specific services that have been or will be provided.

Tax occurs on physical assets, including property and transactions, such as a sale of stock, or a home.

Types of taxes include income, corporate, capital gains, property, inheritance, and sales.

Taxation is differentiated from other forms of payment, such as market exchanges, in that taxation does not require consent and is not directly tied to any services rendered. The government compels taxation through an implicit or explicit  threat of force. Taxation is legally different than extortion or a protection racket because the imposing institution is a government, not private actors. Tax systems have varied considerably across jurisdictions and time. In most modern systems, taxation occurs on both physical assets, such as property and specific events, such as a sales transaction. The formulation of tax policies is one of the most critical and contentious issues in modern politics.

  1.   REAL ESTATE TAXATION

Real estate taxation is a tax that has to do with property. It is also called property tax. These are taxes levied by the government authority of the jurisdiction in which the property is located. This can be federal government, state government or local government. Multiple jurisdictions may tax the same property. Under a real estate tax system the government required or performs an appraisal of the monetary valve of each property and tax is assessed in proportion to that value.

Real estate property tax is sometimes called a millage tax or an ‚Äúad valorem‚ÄĚ tax, names that refer to how it is calculated, as explained below. The tax is imposed by the governing authority of the jurisdiction in which the property is located. It is usually paid to a local governmental body, such as a county, and includes taxes imposed by special purpose districts, such as school and library districts. Property taxes vary greatly from area to area and are often a major source of revenue for local governmental bodies.

For homeowners, the burden of the property tax can be substantial. It constitutes about one quarter of homeownership costs at the median home ownership duration. In recent years, some states have enacted laws to limit property tax burdens. These laws range from restrictions on the property tax formula, explained below, to reductions or ‚Äúcaps‚ÄĚ on tax liability. Homestead exemptions lower property tax bills for owner-occupied housing, while ‚Äúcircuit breakers‚ÄĚ reduce the level of tax for certain homeowners, usually the elderly or low-income households. Abatements eliminate the tax on designated parcels of land or for classes of taxpayers, such as seniors or veterans. Some states require supermajorities to increase property taxes.

Real estate tax, which is based on ownership of land and buildings, should be distinguished from a tax on personal property, on rents, or on intangible investments, such as stocks and bonds. General real estate taxes, which are based on property value, should also be distinguished from special assessments, which are based on some benefit to the property, such as the installation of new sidewalks.

Assessment

The process generally starts with the local assessor’s office, which reviews and values all the property to be assessed in the jurisdiction. Your local assessor may have a website that explains that process in detail. In establishing value, the assessor will consider the size and location of the land, the number and size of structures, the number and type of rooms and other physical characteristics of those structures, and the quality of construction. This information may be compared to the sale prices of similar properties or used to estimate the cost to replace the structures or the potential rental income.

How often the assessor reexamines valuation differs from area to area. Generally, the sale of property or the issuance of permits for home improvement will trigger reevaluation of its market value.

Challenging the Assessment

There have been challenges assessments especially in FCT-Abuja as regards to tenement rate and ground rent.

While the assessor does not set the tax rate, which is not subject to an individual challenge, you can challenge the valuation of your property or the failure to apply exemptions or abatements to which you believe you are entitled. Contact the assessor’s office and ask how the valuation was calculated and how to initiate an appeal. Check for errors in the description of your property.

Consider particular characteristics that might reduce the value of your property as compared to other properties, such as a location on a busy street. Examine recent comparable sales. There are now several websites that provide this information. A real estate agent may be willing to help. You can also hire an appraiser, but before you spend the money, ask whether the appeals body accepts outside appraisals as evidence.

  1.  TAXES INVOLVED IN REAL ESTATE IN NIGERIA

Taxation in Property Law Practice in Nigeria

Taxation involves a monetary imposition on persons, property, transactions to yield public revenue. Taxation is compulsory and not voluntary – forceful imposition. For the purpose of property law practice, taxation or taxes imposed are:

  • Stamp Duties
  • Value Added Tax
  • Capital Gains Tax
  • Personal Income Tax
  • Tenement Rate
  • Land Use Charge/ Ground rent
  • Consent fees
  • Registration fees
  • Estate duty
  • Withholding Tax
  • Companies Income Tax

THE REGULATORY LAWS ARE:

  • Stamp Duties Act
  • Value Added Tax Act
  • Capital Gains Tax Act
  • Personal Income Tax Act
  • Companies Income Tax Act
  • Tenement Rate Laws of the states.
  • Finance Act
  • Land Instrument Registration Laws

The Federal Government through the Federal Inland Revenue Services. The taxes collected by it includes:

  • Companies Income Tax
  • Stamp Duties on corporate bodies.
  • Capital Gains Tax on corporate bodies
  • WHT on corporate bodies
  • Value Added Tax

State Government through the State Inland Revenue Service of the state. The taxes collected by it includes:

  • Personal Income Tax on residents (individual)
  • Capital Gains Tax (transactions between only individuals)
  • WHT Tax between Individuals
  • Stamp Duties on instrument executed by individuals.
  • Consent fees
  • Registration fees
  • Estate duty

 

Local Government Council, the tax collected by it is either tenement rate in other states and land use charge in Lagos state.

Stamp Duties

Stamp duties are regulated by the Stamp Duties Act and come into play in perfection stage of conveyance or instrument

Importantly, stamp duties is not paid on transaction or property or persons but on the document that evidences the relationship between the parties thus a document tax and no document can be stamped unless covered by the Act pursuant to Section 23 SDA. The following are the documents to be stamped:

  • Agreement or contract accompanied by a deposit
  • Agreement for a sale of property
  • Assignment
  • Conveyances
  • Power of Attorney
  • Lease
  • Mortgage

 

There are two ways of calculating stamp duties

Ad valorem: this is the general way thus stamp duties are charged ad valorem generally. Section 4(2) Stamp Duties Act. Ad valorem is a computation based on the value of the property. It is determined by the consideration and in accordance with the scale stated in the schedule. The higher the consideration, the higher the amount to be paid in stamp duty. The computation is as follows.

  • Conveyances on sale – 75k for every N50, s. 52
  • Leases – N30 for every N200
  • Mortgages – 75k for every N200

 

  1.      Fixed duty Рthis computation disregard the value of the property and give a flat rate (nominal rate) s. 25 SDA. Payable on deed poll such as power of attorney.

Capital Gains Tax (CGT)

CGT is a tax that is charged on the gains accruable on a disposal of assets. A disposal of assets occurs when any capital sum is derived from a sale, lease, transfer, assignment, compulsory acquisition or other disposition of assets. See section 6(1) Capital Gains Tax Act (CGTA)

The following are not disposal of assets for the purpose of CGT:

  1.      Conveyance or transfer by way of security of an asset (mortgage or charge). See section 7(4) CGTA
  2.      Transfer or reconveyance on redemption of a security. See section 7(4) CGTA
  3.      Devolution on personal representative of assets of a deceased person. See section 8(4) CGTA
  4.      Vesting in beneficiaries, the assets of a deceased person. See section 8(4) CGTA

In all the fore going instances, CGT is neither charged nor paid because there is no disposal of assets.

The chargeable gain is the difference between the cost of the asset and the consideration received on its disposal.

The tax is on the gain. Thus, if no gain is made or realised from the disposal of an asset, CGT will NOT be charged or paid.

The rate of CGT is 10% of the gain made. See section 2(1) CGTA

Allowable Income or expenses: before the tax is computed, allowable incomes or expenses are deducted from the gain. Allowable incomes or expenses are the expenses that are wholly, exclusively and necessarily incurred for the acquisition of the asset together with incidental costs. Section 13 CGTA. Allowable income or expenses include:

  1.      The cost of acquiring the property. That is, the amount or value of consideration spent in acquiring the asset
  2.      Incidental costs of the acquisition
  3. Cost of improvements to the property. That is, expenses incurred in enhancing the value, state or nature of the asset before disposal
  4. Any amount incurred in establishing, preserving or defending the deposer’s title to or right over the asset; and
  5.  Incidental costs of the disposal which may include costs of advertisements, valuation and fees, commission and remuneration paid to professionals involved in the disposal.

Persons exempted from paying CGT:

  1. Ecclesiastical, charitable, or educational institutions of a public character
  2.      Statutory/registered friendly societies
  3.      Co-operative societies registered under the co-operative society laws of a state
  4.      Trade unions registered under the Trade Unions Act and the disposal of asset or gain must be connected to the purposes of the union for the exemption to apply. See section 26(1) CGTA
  5.      Gains accruing to any local government
  6.      Disposition by way of gifts. See section 40 CGTA
  7.      Gains accruing to any company or authority established by law to purchase and export commodities from Nigeria or for fostering economic development of Nigeria. See section 27 CGTA

Value Added Tax

2019 Finance Act has exempted real estate transactions from VAT. However, professional and agency services such as Legal, Engineering Services, marketing services and other consultancy services rendered in course of  real estate transactions are not exempted from VAT

Personal Income Tax

Personal Income Tax is regulated by Personal Income Tax Act. This tax is paid by individual, a group or business and not a limited liability company. An individual may be assessed on the pay as you earn scheme -PAYE and upon payment of tax, a tax clearance certificate is usually given pursuant to section 84(1) PITA. Relevant authority or state where the personal income tax can be paid to is determined by residence – where the person resides and not where he works. Profits, commissions and incomes made by individuals from real estate transactions are subjected to personal income tax.

Consent Fees

Consent fee is the payment made in obtaining the consent of the Governor of a state in furtherance of s. 22 Land Use Act. Consent is obtained in lease, assignment, mortgage and other form of alienation of interest. The fee is paid to Governor through the Ministry of Land. In Lagos state, the rate payable is 8% of the assessed value of the property. Only the states of the federation can collect this fee.

Registration fee

This is the fee paid for the registration of instrument at the Land’s Registry. For instance, in Lagos state, it is calculated at 3% of the assessed value of the property. This is payable to the government of each state.

Estate duty

This is payable in respect of a deceased’s real and personal property. For instance, the amount payable as estate duty is 10% in Lagos state and it is calculated based on the gross value of the estate.

Tenement rate

This is charged by virtue of the Tenement Rate Law of the various states. The tenement rate is payable annually on buildings situated within a particular local government area. It is also known as the property tax in some areas. For instance, in Lagos state, it forms part of land use charge under the Land Use Charge Law of Lagos. The considerations for the land use charge are:

Consent Fees

Consent fee is the payment made in obtaining the consent of the Governor of a state in furtherance of s. 22 Land Use Act. Consent is obtained in lease, assignment, mortgage and other form of alienation of interest. The fee is paid to Governor through the Ministry of Land. In Lagos state, the rate payable is 8% of the assessed value of the property. Only the states of the federation can collect this fee.

Registration fee

This is the fee paid for the registration of instrument at the Land’s Registry. For instance, in Lagos state, it is calculated at 3% of the assessed value of the property. This is payable to the government of each state.

Estate duty

This is payable in respect of a deceased’s real and personal property. For instance, the amount payable as estate duty is 10% in Lagos state and it is calculated based on the gross value of the estate.

Tenement rate

This is charged by virtue of the Tenement Rate Law of the various states. The tenement rate is payable annually on buildings situated within a particular local government area. It is also known as the property tax in some areas. For instance, in Lagos state, it forms part of land use charge under the Land Use Charge Law of Lagos. The considerations for the land use charge are:

The location of the property

The purpose for which the property will be used

Nature of the property

And it is assessed annually

Ethical considerations for solicitors in respect of taxation

  • A solicitor must advise his client to pay taxes on property transaction
  • A solicitor must pay his tax when he receives an income
  • A solicitor should not collude with his client to evade payment of tax.
  • Do not reduce or save money for your client.

Withholding Tax

Where a contract is awarded from the construction as relates to real estate, WHT of  5% is expected to be withhold on such contract. Also where lease or rent is transacted, the tenant (Leasee) is expected to withhold 10% from the payment to landlord (Leasor)

Land Use Charge/ Ground rent

Ground rent is a tax charged and collected by a state government on land (both developed or undeveloped) that was granted by the state government. The provisions of the Land Use Charge Law of Lagos 2020 especially Sections 2(1) and 14 empower the Governor to levy land use charges on all lands within the state.

Company income tax

Limited liability companies involves in real estate business are expected to pay company income tax and education tax from profits made from real estate business through profit made from sales of properties as well as rent received and fees made from agency services.

REAL ESTATE INVESTMENT COMPANIES (REIC) IN NIGERIA

Tax Implications of Operation of Real Estate Investment Companies (‚ÄėREIC‚Äô) in Nigeria

Section 105 of CITA defines a ‚ÄúReal Estate Investment Company‚ÄĚ (REIC) as a Company duly approved by the Securities and Exchange Commission to operate as a real estate investment scheme in Nigeria.

In this Information Circular:

‚ÄúReal Estate Investment Schemes‚ÄĚ (REIS) ‚Äúincludes a company, trust or other such corporate structures approved and regulated by the Securities and Exchange Commission, which is primarily engaged in and invest in income generating real estate asset or real estate related asset and is expected to distribute not less than 75% of its income within 12 months of receipt of the income‚ÄĚ

‚ÄúReal estate‚ÄĚ for the purpose of this circular, means income generating property consisting of land or building. It also includes special purpose vehicle (SPV) holding such income generating lands and buildings.

Nature of Business

REIS are investment vehicles, which pool funds from investors comprising of individuals, companies, pension funds, associations etc. for investments in real estate as an asset class. REIS are usually established to acquire, develop and hold portfolios of real

estate assets, and do not generally hold a single asset. While some REIS focus their investment specifically according to geographic location, others are structured to invest in specific property types. They primarily engage in and invest in income generating real estate asset or real estate related asset.

Income of REIC

Income of a REIC may be classified into four:

  1. Rental Income
  2. Dividend from another REIC

iii. Gains from disposal of assets

  1. Others (fees and other income not related to REIS)

Taxation of the Income of REIC

Dividend and Rental Income of REIC Earned under a REIS

The following provisions of CITA shall apply to dividend and rental income of REIC earned under a REIS:

Section 19 of CITA

Distributions of rental and dividend income made by a REIC to its shareholders under REIS are exempt from the application of Section 19 of CITA. As such, where a REIC distributes the rental or dividend income to its shareholders under REIS, the distributed income shall not constitute dividend for the purposes of Section 19 of CITA.

Consequently, rental and dividend income distributed to shareholders shall be deducted from the total dividend paid to arrive at the net amount of dividend that is relevant for the purposes of Section 19 of CITA.

 

Section 19 of CITA shall not apply to distribution made by a REIC to its shareholders from rental and dividend income provided that:

  1. a minimum of 75% of dividend and rental income is distributed, and
  2. Such distribution is made within 12 months of the end of the financial year in which the dividend or rental income was earned.

NOTE:

Where the two conditions are not met, the distribution shall be included for tax under Section 19 of CITA.

 Section 23 of CITA

Section 23(1) (s) of CITA exempts the rental or dividend income received by a REIC under a REIS from further tax in the hand of the Company. That is, the gross amount of rental income and dividend received by a REIC will be treated as a non-taxable income, because the amount is deemed received on behalf of its shareholders. Where such income is already included in the profits of the company, it will be deducted in computing the assessable profits of the company.

However, in order to qualify for this exemption, the REIC must fulfill the following conditions:

  1. Not less than 75% of such rental or dividend income received shall be distributed to the shareholders; and
  2. Such distribution shall be done not later than 12 months after the end of the financial year in which the rental or dividend income was received.

For example, if a REIC receives a rental or dividend income during its financial year 1st July 2019 to 30th June 2020, that income must be distributed to the shareholders not later than 30th June 2021.

NOTE:

The dividend or rental income distributed by the Real Estate Investment Company to the shareholders is fully taxable in the hands of the recipient shareholders.

Section 24 of CITA

In accordance with Section 24(1)(k) of CITA, dividends or mandatory distributions made by the REIC to its shareholders under REIS is an allowable deduction.

Note that the rental or dividend income received by a REIC is exempt from tax under Section 23(1) (s) of CITA. However, in line with section 27(1)(h),

The following shall not be allowed as deduction in computing the company’s assessable profits;

  1. any distribution made by REIC to its shareholders; and
  2. Any expense of the REIC incurred for the purposes of earning income that is exempt from tax.

However, where the conditions for exemption provided in Section 23(1)(s) of the Act are not met, rental or dividend income received by the REIC shall constitute a taxable income under Section 9 of the Act. Consequently, all expenses incurred for the purposes of earning the rental and dividend income, including expenses incidental to dividends or mandatory distributions made by the REIC to its shareholders, under a REIS shall be allowed.

Section 80 of CITA

Any distribution or dividend payment made to a REIC pursuant to a REIS shall not be subject to WHT under Section 80 of CITA. Consequently, such distribution or dividend payment shall not constitute “franked investment income”. However, where such distribution or dividend payment, to a REIC, is not under a REIS, such payment shall be subject to WHT appropriately.

Section 80 (5) & (6) of CITA

A REIC making a distribution or dividend payment to its shareholders shall withhold tax at the rate of 10% and remit the amount so deducted to the relevant tax authorities, unless such shareholder is a REIC under a REIS.

Fees and Other Income

There are no tax exemptions or concessions applicable to gains, fees and other income of REIC other than dividend or rental income under a REIS. Such items of income are taxable in accordance with the provisions of the relevant laws.

  1.   CONCLUSION AND RECOMMENDATIONS

Conclusion

Real Estate Tax (Property Tax) is one of the Taxes upon which taxpayers accuse the government of multiple taxation. This is because property tax is designed in such a way where multiple jurisdictions may tax the same property.

In real estate tax in Nigeria, Federal, State and Local government are given the jurisdiction to tax properties depending on location and nature of tax or levy to be taxed. For instance, in Abuja, while the FCT Administration is taxing a property on the basis of ground rent, the municipal is also taxing the same property on tenement rate. This is a result of multiple jurisdictions seen in real estate taxation in Nigeria.

Recommendations

  1. Government should intensify effort to increase revenue collection through the capital gains tax. So may properties are bought and sold and capital gains tax is not collected.
  2. There is need for harmony among federal state and local government on taxes on property (real estate) transactions in Nigeria. There seems to be disharmony among the various levels of government when it comes to property tax in Nigeria.
  3. There is need to have a regular review of property tax (real estate tax) in Nigeria so as to meet up with modern needs and challenges.

References

  • Chaman Law Firm Team (2021): Taxation in Law Property Practice in Nigeria
  • Federal Inland Revenue Service (FIRS) 2021: Information Circular
  • Kennedy Iwundu (2022): Contemporary Issues on Taxation in Nigeria
  • 2019 Finance Act
  • 2020 Finance Act

 

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