The New Property Tax Law in Turkey | Changes and Challenges for 2024

The New Property Tax Law in Turkey | Changes and Challenges for 2024

1. Rental Income:

Rental income refers to the revenue generated from leasing properties and rights mentioned in Article 70 of the Income Tax Law, termed as “capital real estate income”. This income is subject to income tax under certain conditions. Property owners and lessees who earn income from leasing properties or leased rights are required to pay tax on capital real estate income.

2. Properties and Rights Subject to Lease:

Properties and rights subject to lease according to Article 70 of the Income Tax Law include:

• Lands and buildings, including rent received for furnishing buildings in furnished leasing situations.
• Mineral waters, groundwater, minerals, rock quarries, sand and gravel production sites, brick and tile factories, salt factories, their main parts, and details.
• Fishing sites and cages.
• Parts and details of leased properties separately and all their fixed facilities, equipment, and registered properties as real estates.
• Rights of research, operation, privilege, licenses, trade cards, trademarks, trade names, all kinds of technical drawings, models, plans, cinema and television films, audio and visual tapes, information acquired in industrial, commercial, and scientific fields, including formula or manufacturing method confidentiality.
• Intellectual property rights.
• Ships and ship shares, including all motorized transport means.
• Motorized and non-motorized transport means, including all types of vehicles, machinery, equipment, and accessories.

3. Collection of Rental Income:

The receipt of income in rent has been linked to the principle of collection. According to the collection principle, rental income must be collected either in cash or in kind to be subject to tax.

3.1. Collection of Rent in Cash:

Collecting rent in cash is considered whether the rent is paid in Turkish Lira or in foreign currency. Received check amounts are also considered cash collection.

• Rental amounts collected from taxpayers for the current or previous years are considered income for the year in which the collection occurred. For example, if rental amounts for 2021, 2022, and 2023 are collected collectively in 2023, these revenues will be considered income for 2023.

• Rental amounts collected in advance for future years are considered income for the year in which the collection occurred, not for the year of payment. For example, if rental amounts for 2023, 2024, and 2025 are collected collectively in 2023, the rental amount for each year will be considered income for the corresponding year.

In foreign currency rental transactions, the gross total of rental income is determined using the exchange rate of the Turkish Lira against the foreign currency approved by the Central Bank of Turkey on the date of collection.

3.2. Collection of Rent in Kind:

In the case of receiving rent in kind (properties, items, etc.), the amounts received are converted into an assessed value in accordance with the provisions of Article 213 of the Tax Procedure Law, using the corresponding reference value in currency.

3.3. Collection and Payment of Rent through Banks or Post Offices:

According to the general instructions regarding proving the collection and payment of rents in house and office rental transactions, which were published under announcements No. 268 and 298, the following applies:

• For residential units with a monthly rent exceeding 500 Turkish Lira and above, and for short-term house rental operations such as weekly or daily rentals, it is required to prove the collection and payment of rent through banks or postal institutions, and to provide documented evidence for these transactions. Receipts or account statements issued by these institutions are considered supporting documents.

• This obligation also includes the collection of a fine at a rate of 5% of the amount involved in each transaction, not less than the limit set for that year according to Article 355 of the Tax Procedure Law.

These procedures aim to ensure the implementation of reliable and transparent rent collection and payment methods, and to enhance compliance with the applicable tax regulations by landlords and tenants.

3.4. Registration of Rental Income Records for Taxpayers Required to Maintain Records:

According to Article 213 of the Tax Procedure Law, natural person taxpayers who are required to maintain records must keep detailed records separate from records of other revenue determinations, business ledgers, or professional income books. These records should be used to record taxable rental income, the revenues collected from it, and the related expenses.

4. Absence or Reduction of Rent Amount:

According to Article 213 of the Tax Procedure Law, natural person taxpayers who are required to maintain records must keep detailed separate records to register taxable rental income, the revenues collected from it, and the related expenses.

In the case of the absence of rent or its reduction, the “normal rental value” is relied upon as a basis. The normal rental value is determined as 10% of the cost value of the property or other non-real estate rights. If this value is not known, the normal rental value is 10% of the estimated value according to the provisions of the Income Tax Law regarding asset valuation.

Here are some cases where the principle of the normal rental value does not apply:

• Leaving the property vacant and providing it for free use to others.
• When the rent amount for the leased property is less than the normal rental value.

The Tax Law clearly defines cases where the principle of the normal rental value does not apply, such as leaving properties vacant for others to use for free or allocating buildings for family residence or providing rent-free accommodations to relatives or rentals through government agencies.

According to Article 21 of Article 10 of Law No. 7440, in areas deemed by the Ministry of Finance and Treasury as being in a state of distress due to earthquakes that occurred in the province of Kahramanmaraş, the principle of the normal rental value will not be applied for the year 2023 to properties allocated for free use to natural persons who have a residence as of 6/2/2023.

5. Application of Exception for Residential Rental Income:

An amount of 21,000 Turkish Lira (33,000 Turkish Lira for the year 2024) was exempted from the total revenues collected during the calendar year 2023 from building rentals as residences from income tax. If the rental income from residences does not exceed the specified amount annually, there will be no need to submit a tax return for these incomes.

For example, in 2023, taxpayer (B) rented out his apartment for a monthly amount of 1,700 Turkish Lira, thus earning an annual income of 20,400 Turkish Lira. Since this amount is less than the exempted amount for residential rentals of 21,000 Turkish Lira, there will be no need to submit a tax return for this income.

If rental income from residences is not reported in a timely manner or is reported incompletely, taxpayers will not be able to benefit from the specified exemption amount for 2023 of 21,000 Turkish Lira. However, before any assessment by the authorities, those who submit a tax return later covering such incomes that were not reported on time or reported incompletely can benefit from this exemption.

In case of receiving rental income from residences exceeding the exempted amount, the exempted amount must be deducted from the annual income reported in the tax return.

The exception for residential rentals applies only to revenues collected from leasing properties as residences. The exception does not apply to rental incomes from commercial purposes.

For property incomes, individuals subject to regular tax departments, including natural persons who are required to report their business, agricultural, or professional income, as well as those who earn rental incomes from residences exceeding 21,000 Turkish Lira, regardless of whether they are required to report them or not, and the total amounts of their annual income from wages, income from securities, income from properties, and other profits and incomes, separately or collectively, must report their incomes correctly.

If the taxpayer has multiple houses earning rental incomes, the exempted amount will be applied once to the total rental income of the houses.

6. Acceptable Deductible Expenses in Actual Expenses Method:

The two different methods used to determine net income from rental income in income tax are:

1. Actual Expenses Method:

• Net income is calculated by deducting the actual expenses incurred in renting the property from the gross revenues.
• Taxpayers are required to document and record all actual expenses related to the property, such as maintenance costs, repairs, insurance, taxes, and fees.

2. General Expenses Method (except for those leasing rights):

• Net income is estimated by estimating general expenses using a specified percentage of gross revenues, instead of determining actual expenses.
• Taxpayers are not required to document actual expenses under this method.

Taxpayers must choose one of the methods and apply it to all properties they own. Taxpayers who have chosen the general expenses method cannot revert to the actual expenses method before a certain period of time, which is often two years.

6.1. Acceptable Deductible Expenses in Actual Expenses Method:

The actual expenses method allows taxpayers to deduct the following expenses from the net income to determine the net income in income tax according to Article 74 of the Income Tax Law:

1. Utilities Costs: Include lighting, heating, water, and elevator costs borne by the tenants.
2. Administrative Expenses: Include expenses paid for managing leased properties proportional to the property’s importance.
3. Insurance Costs: Include insurance costs for leased properties.
4. Debt Interest: Include interest on loans paid to finance leased properties.
5. Acquisition Ratio: 5% of the acquisition value of the leased property for 5 years.
6. Taxes and Fees: Include taxes and fees paid to municipalities and local authorities for leased properties.
7. Targeted Consumption: Include costs of improvements aimed at improving energy efficiency and thermal insulation.
8. Maintenance and Repair Costs: Include maintenance and repair costs incurred by tenants for leased properties.
9. Other Actual Rents and Expenses: Include rents and other expenses paid by tenants for properties and rights leased.
10. Rents Paid by Property Owners: Include rents paid by property owners who live in or lease their properties.
11. Compensation and Losses: Include compensation and losses paid due to damages to the leased property.

Taxpayers must keep documents related to expenses for 5 years from the year they belong to and submit them upon request by the tax authority.

6.2. Deductible Expenses When Benefiting from the Exception in the Actual Expenses Method:

If choosing the actual expenses method and benefiting from the exception in residential rental incomes, the portion of actual expenses related to the exception will not be deducted from the net income.

The portion of expenses that can be deducted from taxable income can be calculated using the following formula:

(Total Expenses × Taxable Income) / Total Revenue

(*) Taxable Income = Total Revenue – Residential Rental Income Exception

Example: Taxpayer (D) rented out his apartment he owns in 2023, earning 120,000 Turkish Lira in revenues plus spending 40,000 Turkish Lira on the property. The taxpayer chose the actual expenses method.

The taxpayer can deduct a portion of the actual expenses amounting to 40,000 Turkish Lira from taxable income.

Taxable Income = 120,000 – 21,000

= 99,000 Turkish Lira

Deductible Expenses = (40,000 × 99,000) / 120,000

= 33,000 Turkish Lira

Therefore, the actual expenses deductible from rental income will be 33,000 Turkish Lira.

6.3. Deducting Expenses in the General Expenses Method:

• Taxpayers who prefer the general expenses method are allowed to benefit from a deduction of 15% of their total revenues as general expenses, after excluding residential rental income.
• Those who lease rights are not allowed to use the general expenses method.
• For taxpayers who earn income from leasing offices in addition to leasing rights, they are required to choose the actual expenses method when filing their tax returns.

7. Loss Cases:

• Losses resulting from some sources of income are acceptable in distinguishing between other sources of income, except for losses arising from other sources of income according to Article 80 of the Income Tax Law.
• Losses resulting from the reduction of the capital value of properties are not considered losses, and this type of loss is not considered a deductible expense when calculating net income. However, losses resulting from surpluses in expenses can be deducted over the next five years from the income received.
• There are two exceptions to this rule:
• In the case of a loss arising from paying rent for the place where property owners who rent it live, this loss cannot be used as a deductible expense from future income on residential properties.
• The non-deductible portion of the acquisition value of residential property, representing 5% of it, cannot be considered a surplus in expenses, and therefore cannot be used as a loss in future years for property income.

8. Tax Deduction in Rent Payments:

According to Article 94 of the Income Tax Law, individuals and entities mentioned therein must carry out tax deduction (withholding) on rental payments they make when leasing properties that constitute the subject of property income.

Tenants, whether individuals or entities, will carry out tax deduction on the rental payment amount at a rate of 20% of the total value.

This tax deduction is carried out on rental amounts paid in advance for future months or years.

However, if the tenant is a person whose income is determined by a simple method, he is not required to perform tax deduction when paying rent payments.

Regarding properties used for both residential and commercial purposes, if the property is used partially or entirely as a place of business, the tax deduction will be applied to the entire rental amount.

9. Filing Income Declarations:

Those responsible for submitting annual income declarations for property income are:

• Individuals who have earned rental income from apartments that exceeded 21,000 Turkish Lira for the year 2023 (33,000 Turkish Lira for the year 2024).
• Individuals who have earned income from leasing offices subject to tax withholding and whose total taxable income reached limits of 150,000 Turkish Lira for the year 2023 (230,000 Turkish Lira for the year 2024).
• Individuals who have earned income from leasing properties and rights that exceeded 8,400 Turkish Lira for the year 2023 (13,000 Turkish Lira for the year 2024) and are not subject to tax withholding or exceptions.

For the submission of declarations for income not subject to tax withholding or exceptions, such as the income from a place determined by a simple method for the individual taxpayer who rents an office, 8,400 Turkish Lira is not an exception but rather the declaration limit. When the rental income from this place exceeds this amount, the entire amount must be reported.

Family members must submit individual declarations for the rental income from properties and rights they earn on an individual basis.

In the case of a minor or incapacitated taxpayer, the annual tax declaration is signed by the guardian, trustee, or manager.

In the case of jointly owned properties and rights, each partner must report the income related to their individual share of rental income.

The “Guide to Rental Income for Non-Residents in Turkey (Small Taxpayers)” can be accessed through the website of the Tax Administration Presidency (gib.gov.tr).

10. Deductions on Income Included in the Annual Declaration:

Deductions available on the income declared in the annual declaration have been determined according to the Income Tax Law and other relevant legislation. Determining the income tax base requires having specific income in the annual declaration, and the required deductions must comply with the specified conditions in the relevant legislation.

The declared income will be considered as the base amount used to calculate the deductible amount, without relying on tax deductions and losses from previous years.

Here are some topics that can be deducted:

1. Health / life insurance payments.
2. Educational and healthcare expenses.
3. Donations that can be partially deducted from the declared income, in addition to donations that can be fully deducted.
4. Sponsorship expenses.
5. Cash and in-kind donations made to aid campaigns initiated by the President.
6. Cash donations made to the Turkish Red Crescent Society and the Turkish Hearths Association, excluding economic institutions.
7. Deduction for individual participation in investment.
8. Donations and aids that can be fully deducted according to other laws.

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