Residential properties in the United Arab Emirates (UAE) have also been subject to Value Added Tax (VAT). Yet there are exceptions and deductions for homeowners and property investors. This article aims to provide its readers with a complete notion of the tax exemptions applied to residential properties in the UAE.
Tax exemptions for residential properties
VAT however applies to UAE-based residential properties but there are some exemptions to primary and secondary market transactions.
Definitions for Residential Properties
According to the Federal Tax Authority (FTA), the following types of buildings are considered residential:
- Not serviced villas, townhouses, apartments.
- Student and laborers Housing.
- Police and other armed forces accommodation.
- Rest homes, nursing homes, and orphanages.
Exemptions for Property Owners in the Secondary Market
If you own a property that only involves residential activities, you cannot charge VAT on rent or sales of a property. Therefore, you cannot claim tax returns on these transactions of the secondary or resale property market. It should be noted, however, that VAT continues to apply to services, including property maintenance, upkeep, agency commission fees, owner association costs, and property management services.
Exemptions for Tenants
If you are a tenant, you are VAT-exempt to rent. But you should be prepared to pay VAT on the services such as water, electricity, gas, air conditioning, and fees for an agency, although you do not need to charge it yourself (if there is no VAT on the agency(ies), it is quite likely that you may not pay VAT on it anyway). VAT exemptions also apply to government services relating to property registration, so only the usual fees will be charged.
Exemptions for Buyers in the Primary Market
For properties developed for residential use, there is no VAT on the property for the first three completions years. That allows developers to reclaim the VAT they pay out, specifically for the design, materials, construction and contracting, since those are deemed business costs. We can note also that in launches that were in 2018, developers did not notice to pass any VAT costs on buyers.
Table: VAT Treatment of Properties in UAE
| Property Type | Sale or Rent | VAT Treatment | Notes |
| Residential buildings (not serviced) | Sale | VAT not charged | Only if seller does not register and does not recover VAT on expenses |
| Buyer cannot recover VAT | |||
| Rent | VAT not charged | Only if owner does not register and does not recover VAT on expenses | |
| Owner cannot recover VAT on expenses | |||
| Commercial buildings | Sale | VAT charged at 5% | Only if the buyer is registered and pays VAT, which can be recovered |
| Seller recovers VAT on expenses | |||
| Rent | Owner registers for VAT | ||
| Owner charges 5% VAT | |||
| Owner recovers VAT on expenses | |||
| Newly built property | Sale | 0% VAT | Only if the developer is registered and recovers VAT on expenses |
| Commercial buildings (costing > AED 5m) | Sale | Buyer pays VAT at 5% | Buyer can recover VAT on tax return related to period of purchase |
| Buyer monitors use of the building for 10 years | VAT recovery may need to be adjusted if there is a change of use | ||
| Serviced apartments | Sale or Rent | VAT charged at 5% | |
| Short-term lets (6 months or less) | Rent | VAT charged at 5% | |
| UAE Citizen's own residence | Construction | VAT incurred on supplies | VAT can be claimed for refund within 6 months of moving in or obtaining completion certificate |
Mortgage Interest Tax Deductions
Residential property mortgage interest paid in the UAE can be claimed as a tax deduction. The deduction is meant for UAE nationals and expats who are tax residents of the UAE. For a maximum of 15 years, mortgage interest tax deduction is capped at AED 3 million.
Real Estate Tax Incentives
In the UAE, there are quite a few real estate tax incentives to help make homeownership and investment in the property market easier. These incentives include:
- Reduced or waived the registration fees for first-time home buyers.
- Long-term residency visas for property investors
- Rental income by the UAE nationals is tax-free.
Capital Gains Tax Exemption on Home Sales
If you sell a residential property that you have owned for more than three years you are not subject to capital gains tax. This exemption also covers UAE nationals and expatriates.
Tax Exemptions for Veterans
Tax exemption on residential property is offered to UAE veterans. The exemptions include:
- No registration fee for a residential property purchased.
- Property taxes reduced or waived.
- Priority access to government-subsidized housing.
Local Property Tax Exemptions
Homeowners and property investors in the UAE are entitled to local government property tax exemptions. These exemptions vary by emirate and include:
- Dubai: Residential property tax-free.
- Abu Dhabi: Residential Property – Through UAE govt agencies (Emirates Housing and Land Dept.), rates of 3% property tax, however, exemptions apply for UAE nationals and first-time homebuyers.
- Sharjah: Residential property devoid of property tax.
Energy-Efficient Home Tax Credits
If the owners of residential properties in the UAE install energy-efficient equipment then the government offers tax credits. These credits include:
- Tax credit for solar panel installation.
- Energy efficient appliance tax credit.
- Water saving device tax credit.
FAQs
Q: What is a tax exemption for residential properties?
A: The tax exemption is defined as a reduction or a total elimination of a tax attributed to a particular type of properties for example residential properties.
Q: How to qualify for property tax exemptions?
A: To qualify for property tax exemptions, you must meet those criteria set by the local governments like First-time homebuyer tax credit, senior citizen property tax exemptions or disabled homeowner tax benefits.
Q: What is a homestead exemption?
A: A homestead exemption reduces the amount a property is taxed for the main residence. Nevertheless, homestead exemptions are not applicable in the UAE.
Q: How do property tax exemptions work?
A: Property tax exemptions lower or eliminate the property tax due for a property. However, the exemption amount differs across emirates and types of property.
Q: How much can I save with a property tax exemption?
A: Property tax exemption amounts differ between emirates and types of property. You should consult a tax professional to learn exactly how much you can save.
Q: Do seniors get property tax exemptions?
A: Yes, UAE offers Senior citizen property tax exemptions allowing them to enjoy 0% VAT.
Q: How do disabled homeowners qualify for tax breaks?
A: UAE offers Disabled homeowner tax benefits in some of the emirates, like Dubai. The exemption amount however varies by Emirate and type of disability.
Q: Who qualifies for mortgage interest tax deductions?
A: The mortgage interest tax deduction applies to UAE nationals and expatriates who are also tax residents of the UAE.
Conclusion
In conclusion, the complexity arising from tax exemptions for residential properties in the UAE requires an expert to comply with all legislation and make potential tax savings. Hiring experienced corporate tax consultants in UAE helps homeowners and property investors gain insight and strategies on how to maneuver their way in the tax road, to avoid penalties and potential pitfalls.
Shayan Khan is an experienced Corporate Tax Consultant with over 4 years of expertise. He’s skilled in negotiating and investigating taxes with government bodies like the Federal Tax Authority. Shayan is really good at reviewing and drafting tax papers and offers strategic advice on complex tax matters. Clients trust his guidance in navigating tax procedures and minimizing liabilities.
