There Is No Escaping Property Taxes

The purpose of property taxes is to raise revenue for the government. However, is the system fair, and is it okay for some homeowners to resort to tactics, such as underreporting property values or exploiting tax loopholes, that some may say evade tax liabilities?

This property blog post takes a global view on property taxes, exploring their dynamics in various countries and how tax authorities are leveraging AI (Artificial Intelligence) to boost property tax revenue.

Collecting Property Tax

Local, state, and central governments collect property taxes, and as there are several types, they have different names, such as council tax (UK), stamp duty, capital gains tax, and others.

Most countries operate similar models for collecting property taxes. For example, in the UK, there are two primary methods by which property taxes are levied. The first is through a local authority, a local government administration independent of regional or national (central) government.

The second is through the parliament, the United Kingdom’s national legislature. The government generally collects a property tax through a system of local business rates, which are charged at a higher rate to commercial properties and on a different basis for properties located in high-cost or tourist-driven areas.

Property taxes don’t start and finish here, though, as homeowners who own rental properties or second homes are also taxed on the sale’s profit under capital gains tax (CGT). Commercial property owners also have property taxes to pay.

Other countries, including the USA and Australia, also call the tax on property sale profit CGT (capital gains tax).  Taxes – there is no escaping them, and Governments are motivated to collect as much tax revenue as possible.

Should we begrudge paying property taxes?

In theory, no, as there is a valid reason for them. Property taxes are needed to provide public housing and land use services. The dedicated taxes for public services reduce the burden on other taxes.

How successful is the collection of property taxes?

The collection of property taxes in the US, UK, France, and Australia is highly efficient, and digital systems ensure a secure and straightforward payment process.

• In the US, 97% of property owners pay their taxes on time
• In the UK, 97% of properties are currently assessed
• In France and Australia, 99% of properties are assessed

While the collection process is highly effective, many taxpayers remain unconvinced that everyone is paying their fair share of taxes.

However, is everyone paying their fair share?

Property taxes appear to affect low-income earners disproportionately.

USA

Researchers from the Wharton School of the University of Pennsylvania and the University of Chicago investigated homeowners’ perceptions and beliefs about the property tax system in the United States.

They created a Facebook ad to test the effects of a single reminder that homeowners should review their property assessment notices and contest any unjustified assessments. The ad surveyed residents about their perceptions of the property tax system. As expected, it revealed the tax system is inequitable with many flaws, so change is needed to catch higher-income earners using tax planning to lower the tax grab.

UK

The UK government has passed a new document, known as the Land Reform Bill, to replace the Land Reform Act 2014. It aims to update the country’s property tax laws to reflect its changing housing market. The Bill is the government’s latest attempt to reform the country’s property tax laws, first introduced in the early 1900s. However, not so fast – it is currently only in Scotland.

For decades, the UK property tax symbolized the country’s unfairness. It was a regressive tax that primarily affected low-income individuals and significantly contributed to the country’s housing crisis.

Larger property tax bills are on the way for many UK residents with second homes and landlords as the government prepares to implement new tax rules. It appears that tax rules are constantly changing, and for property investors, each revision makes it increasingly difficult to justify owning rental homes as a worthwhile investment.

New rules focus on who can pay more tax, and landlords are low-hanging fruit – ripe for the picking. In other words, landlords are always targeted. Landlords who own more than five properties in the country face higher bills, with those who own more than ten facing the most significant increases.

All landlords are struggling to make the investment profitable. The changes affect millions of landlords, who have also been severely impacted by the current downturn in the rental property market, resulting in lower rent rates.

For wealthier taxpayers, collecting property taxes will be a cat-and-mouse game, with these property owners using professionals and structures to reduce tax liabilities.

AI Improves Property Tax Collection

Artificial Intelligence (AI) has many uses in property tax collection. GeoAI and remote sensing are used for property discovery.

Analyze and Map

Using satellites and aerial photos, AI-powered image recognition models analyse and map building footprints, as well as new developments and removals (demolitions). This information is used to identify discrepancies in property registers.

Any property improvements can also be identified, such as extensions, pools, and decks, all of which add value to the property.

Example

Recently, the French government has used AI (Artificial Intelligence) to identify homeowners who fail to declare the presence of pools. Yes, this is real.

Declare your pool

The BBC reports that undeclared pools have been identified by AI technology used by the French tax authorities. What’s their motivation? Property tax revenue!

As many as 20,000 pools have been identified on properties that have not declared them. Collections can increase the value of properties, potentially leading to higher property taxes. It’s estimated that as much as £8.5 million in revenue will be heading into the French tax coffers, and this event, which utilized AI technology, was just an experiment.

Imagine what AI may discover when it becomes more intelligent and is applied to other purposes, such as analyzing the international real estate holdings of the rich and powerful.

Valuations and Fraud Detection

Other uses of AI in the Property sector include the following:

Property valuations

• Valuations- With AI, the turnaround time for reporting new valuations is quicker, allowing for more frequent updates.
• Fraud – The machine learning feature of AI detects anomalies or patterns in tax data that may suggest fraudulent activities.

Example

According to the World Bank blog, Armenia’s State Revenue Committee utilizes AI to detect anomalies such as duplicate tax filings, invoice inconsistencies, and tax evasion.  A 10 – 15% boost in tax revenue collections confirms the power of AI for Governments.

AI has other uses as well, such as managing repetitive tasks and improving customer service. We all appreciate receiving timely reminders to file our property tax declarations and make payments.

Final Thoughts

Tax planning to reduce your tax burden is what the wealthy and financially astute people do, and it’s legal! However, taxes are a necessary evil to pay for services. Imagine the state of core infrastructures, such as sewerage, stormwater, street lighting, and roading, without investment in their upkeep.

AI to the rescue, with Governments now using it to detect discrepancies, fraudulent activity, and improve taxpayer interactions.