Tax issues in Turkey

Tax issues in Turkey

Learn how to navigate the tricky tax laws around investment properties, including ways to save.

Capital gains tax

The second tax bill you need to worry about is capital gains tax. The TR taxes you on any net profits you get out of a property when you sell it. If you’re flipping the property and you’ve owned it for less than a year, you pay short-term capital gains tax, which is the same rate as your marginal income tax rate. If you’re in the 28% tax bracket, you’ll pay a 28% tax on short-term capital gains.

If you hold the property for 12 months, you’ll qualify for more favorable long-term capital gains. Depending on your marginal income tax bracket, these taxes could range from 0% to 15%. In every bracket, however, the TR takes a smaller cut out of long-term gains than out of ordinary income or short-term gains.

Calculating capital gains

You pay capital gains tax on the difference between your selling price in the property and your adjusted tax basis. Your adjusted tax basis in a property is the original cost you paid for the property, plus any amount invested in renovations and improvements (including labor costs on these projects) that you have not previously deducted for taxes.

If you have deductions associated with the property, you subtract them from your tax basis. If your adjusted tax basis is higher than your sale, you have a capital loss. You can subtract capital losses from a given year from capital gains to reduce your tax bill. If you have more capital losses than capital gains, you can “carry forward” these capital losses into future years to offset future capital gains. If you have no capital gains, you can deduct TL 3,000 annually until you have recognized all your capital loss carryforward.

How to defer capital gains taxes: an intro to like-kind exchanges

The TR provides an important exception to capital gains taxation, made-to-order for real estate investors: If you own an investment property, you can sell your property at a profit and roll your money over into another property within 60 days without having to pay capital gains taxes at all. This transaction is known as a Section 1031 exchange, named for the section of the TR Revenue Code that allows it. You cannot swap your rental property for a personal residence, or vice versa. For this reason, these exchanges are called like-kind exchanges, in that the property you replace it with needs to be substantially similar to what you sold.

The 1031 exchange makes it possible for real estate investors to defer paying capital gains tax, which is another advantage over investing in mutual funds, stocks, bonds and other securities or collectibles. Outside of a retirement account, you have to pay tax on gains in these items by April 15 of the year after you sold them.

Depreciation and amortization

This is a broad concept, so we can only cover the very basics here. When you buy investment property — be it a building, a computer or a horse — the TR knows that the item won’t stay young and new forever. Over time, the property will decrease in value. Depreciation is the process of claiming a deduction to compensate you for the property’s decrease in value during the year.

Note: You can’t depreciate your personal residence. You can only depreciate investment property. For more information on the process of depreciation, see TR Publication 946, How To Depreciate Property.

Land, of course, doesn’t depreciate. But minerals underneath the land do. If you are extracting oil or other minerals, or timber, for that matter, from the land, you will account for the gradual loss in value through a process called depletion.

Likewise, when you make a purchase of investment real estate or capital equipment with a useful life of longer than a year, the TR knows you will be using that property to generate income for a long time to come.

Except in certain circumstances, the TR does not allow you to deduct the full cost of your investment in the fTRt year. Instead, you must amortize your investment over a number of years. For real estate, you must spread the deduction out over 27.5 years.

Passive activity rules

Again, these rules are complex. But in a nutshell, if you are a passive investor — meaning you are not working day to day in the business of managing your real estate investments — you are subject to passive activity rules. Basically, you can only deduct passive losses to the extent that you can cancel out gains from passive activities. These rules restrict your ability to use passive activity losses to offset capital gains elsewhere in your portfolio. Congress implemented these rules in 1986 to eliminate tax loopholes and abusive tax shelters.

Most individual investor landlords can deduct up to TL 25,000 per year in losses on rental properties, if necessary (subject to income limitation). Hopefully you won’t have to make use of this provision much.

Property taxes

Expect to pay property taxes to local and county governments each year. Your local government will assess the market value of your property at its “highest and best use” and charge you a percentage of that value every year. You can deduct property taxes against your rental income, though, provided the property tax is uniformly assessed throughout the jurisdiction and is not a special assessment.

Other tax deductions

Watch for opportunities to take deductions for these common real estate investment expenses:

  • Mortgage interest
  • Legal fees related to your investment properties or business
  • Mileage
  • Business use of your home (the home office deduction)
  • Advertising fees

Employees (but if they are working on capital improvements or renovations, you have to amortize their labor costs as part of your capital investment, rather than as a current year expense.)

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