Government project to revalue real estate for IR purposes: does it make sense?

It was recently reported in the press that President Jair Bolsonaro had asked the Secretary of the Federal Revenue Service, Marcos Cintra, to study the revaluation of real estate for IR purposes. The measure was announced as a means of raising more revenue for the government without increasing taxes. A few days later, the press also reported that a Senate bill (PLS 1/2017), which has now been shelved, had already proposed a similar measure for updating property values.

The aim of this text is to explain what such a proposal really means, if it goes ahead. Although the government has only put forward an idea about the revaluation of real estate for income tax purposes, and not a proposal, it is possible to say that: (i). any taxation in this sense will have to be optional, and not compulsory (i.e. the taxpayer can choose not to participate); (ii). the measure means an anticipation of tax collection, and not a tax increase; and (iii). it is recommended that a measure like this be done once, rather than permanently.

What is the logic of keeping the value of assets and rights declared at cost?

The purpose of the income tax return is to record the taxpayer's increase in assets, which is the object of income taxation (CTN, art. 43). In this sense, it is important to keep track of assets and rights at their acquisition cost. In the case of a house sale, for example, the difference between the price received and the declared acquisition cost is an increase in assets on which income tax may be levied.

This is different, for example, from the declaration of Brazilian capital abroad (DCBE), made to the Central Bank. The purpose of the DCBE is to keep a record of the stock of wealth held by Brazilians abroad for statistical purposes, which requires the best possible calculation of the market value of the assets and rights. The acquisition cost is only of interest if it is not possible to identify the market value of the asset.

For this reason, revaluing the assets and rights reported in the income tax return is only of interest for the purposes of organizing tax collection. Historical examples of this type of measure illustrate this objective.

Revaluation of real estate for IR purposes that has already occurred in the past

This is not the first time that property has been revalued for IR purposes. During the Collor government, the Law no. 8.383/1991Article 96 provided for the revaluation of all assets and rights reported by the individual in the income tax return. All assets and rights would be reported according to their market value on December 31, 1991. The increase compared to previous declarations, in that case, would be considered exempt income, and the new value would be considered a cost when calculating the capital gain on any disposal after that date.

The revaluation made by Law no. 8.383/1991 came about in a different context to ours. There, the aim was not simply to collect tax, but to use the old Ufir as the monetary correction index for all items reported on income tax returns. Thus, all assets and rights existing on December 31, 1991 would be reported at their value in Ufir, so that future capital gains would be automatically adjusted for inflation.

It is worth mentioning that, with the Real Plan, monetary restatement was banned, allowing the acquisition cost to be restated until January 1, 1996 (Law no. 9.249/1995, art. 17).

It is necessary to comment that the revaluation carried out by Law no. 8.383/1991 was mandatory, and this is justified, in our opinion, for two reasons: (i). the valuation was exempt; and (ii). the measure would be carried out only once. The taxable event for income tax is the "economic or legal availability" of income (CTN, art. 43). A revaluation does not in itself mean availability: it is important that the taxpayer is able to use the asset as if it already had an increase in value. For assets with low liquidity, such as real estate, it is quite controversial whether the taxable event took place before a transaction to sell the asset.

Revaluation of real estate for IR purposes - What Senate Bill 1/2017 proposed

PLS 1/2017, authored by then senator Flexa Ribeiro (PSDB-PA), proposed the revaluation of real estate by individuals as follows:

• submit a specific statement with the market value of the properties as of December 31, 2016;
• tax the capital gain corresponding to the positive difference between said market value and the acquisition cost at the flat rate of 10%;
• pay the tax in a single installment;
• from then on, the market value on December 31, 2016 would be adopted as the cost for the future sale of the property; and
• the income tax reduction factors applicable to capital gains on the sale of real estate would be counted from January 2017.

The justification for the bill was the same as the government's: to obtain a short-term increase in revenue. The rate of 10% is lower than the normal rates of 15% to 22.5%, so there would be an incentive for taxpayers to join.

The biggest contrast between PLS 1/2017 and art. 96 of Law no. 8.383/1991 is the fact that taxation here is optional. The wording proposed by PLS 1/2017 made it clear that the taxpayer "could" file the real estate declaration at market value, which means that the taxpayer would have to choose to submit to said taxation.

The justification lies in the same provision of the National Tax Code (CTN): if you can't say that the taxpayer had availability over an increase in assets, you can't force them to pay the tax. Payment must be optional.

What to expect from a possible government bill on property revaluation for IR purposes

If the idea put forward by the government becomes an effective proposal, we shouldn't expect anything very different from what PLS 1/2017 proposed. It would even be possible for PLS 1/2017 to be shelved to serve as the basis for the government's proposal.

It is questionable to what extent this idea would represent effective tax collection. Taxpayers would need to have liquidity to pay the tax, anticipating a benefit that they may not enjoy at all. For example, if a person retains ownership of a property they don't intend to sell, the stimulus of the project is very low, even if the rate is lower than the normal rate.

In the case of real estate, the legislation already allows reductions in the update to market value in exceptional circumstances, such as the transfer of the property by gift or inheritance. The new benefit would conflict with existing tax benefits. Therefore, we believe that such an exceptional measure would only add complexity to the legislation, rather than achieving the government's intended revenue.

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Vinícius Tersi.

This text about revaluation of real estate for IR purposes was prepared by Vinícius Tersi Advocacia, a law firm specializing in International Tax Consulting.