In this article we are going to take a closer look at the real estate acquisition in Bulgaria by natural persons as an investment. We will also draw your attention to the taxes and duties owed for these transactions and will explain the conditions and the amount of taxes due by natural persons by the sale of real estates in Bulgaria.
In recent years, more and more people in Bulgaria are investing their savings in real estates - mainly in apartments, but also in farmland. There are several reasons therefore, the main one being the low interest rates on bank deposits. They are close to the level of the annual inflation rate, which makes keeping your money in bank deposit pointless.
Another reason for the increasing demand from citizens for real estate is the uncertainty that the bank failure of the KTB in 2014 caused. It should be noted that a mistrust in the stability of the banking system in the country is unfounded, nevertheless the insolvency of one of the largest Bulgarian banks has spurred the real estate market.
Acquisition of a residential property
The residential real estate market is enjoying particularly great interest in the major cities of Bulgaria and, in particular, in Sofia, also in view of the continuous immigration of workers to the capital. This results in a relatively stable and high residential property price and an upward trend due to the increased demand. This is precisely what makes real estate so attractive as an investment.
The residential properties in the big cities are mostly acquired for the purpose of renting. In practice it has been proven that the purchase price, which pays off through the rental income for a period of 11 to 13 years, is considered as a good investment. However, such an investment should be carefully considered, as the imbalance between real estate and rental markets is noticeable in some cities. In other words, real estate prices are very high and rental prices are not really high, or vice versa. In the second event, an investment through the purchase of a residential property for rental purposes would be more justified.
It is a common practice to be firstly concluded a preliminary contract for the property purchase, which regulates all rights and obligations as well as the financial details of the future purchase. As a rule, about 10 - 15% of the final purchase price is paid as a “Down payment” within the meaning of Art. 93 of the Law on Obligations and Contracts, whereas the contracting parties secure the fulfillment of their contractual obligations. For the seller, this is the obligation to transfer the ownership of the property free of any mortgages, injunctions, etc., and for the buyer - the obligation to pay the agreed purchase price in due time. If the conclusion of the final notary purchase contract is prevented by the fault of the buyer, the landlord may exercise his right of retention of the down payment. If the notary deal does not take place due to the fault of the seller, the latter has to reimburse the deposit in double the amount. Here you can find more information on all essential aspects when concluding a preliminary contract for real estate purchase.
It is often the case that the property is acquired prior to its commissioning. Most of the time, the legal transaction is concluded before the first groundbreaking for the building through the signing of a Preliminary contract for the construction and purchase and transfer of ownership of the property with the construction company. This is a written contract whereby all essential business points - prices, payment modalities, construction deadlines and commissioning of the property, degree of completion, contractual penalties for non-performance, etc. - are regulated.
Acquisition of farmland
Acquiring of farmland in Bulgaria is proving to be a successful investment for a number of reasons. In the last few years we have witnessed how the big cities are more and more "built up", which leads to reallocation of farmland into urban land (Bulgarian abbreviation "UPI"). Therefore, the trend is towards shrinking of the farmland. This results in a limited supply of farmland on the market, or a higher demand, which in turn is responsible for the constant price increases of the farmland.
Secondly, farmland is not subject of amortization. An investment for its maintenance is not necessary, in contrast to a residential property, which loses value without maintenance. Furthermore, no annual tax is due for owning farmland. Last but not least, the farmland can secure a return for its owner, even if he does not raise any agricultural plants, because he can lease it to farmers who will pay him an annual rent.
It should be noted here that the Bulgarian Farmland Act imposes some restrictions on the right to own farmland, which mainly concern foreign nationals.
Notary ownership transfer of the real estates
The Bulgarian Law on Obligations and Contracts prescribes the notarization of every transfer of real estates. In this way, a higher level of security is to be guaranteed and abuses are to be counteracted.
The purchase contract is concluded in the form of a notarial deed, whereas the contracting parties are named, the property is individualized, the purchase price and the payment terms are specified. The parties shall take part at the notarization in person or could be represented by a proxy who is explicitly authorized to purchase the specific property through a notarized power of attorney.
Several documents shall be attached to the notary deed, such as cadastral sketch of the property (or site plan of the independent object in the building), tax values certificate of the property, certificate of commissioning, etc. The notarized transfer of the ownership is effected by entering of the notarial deed into the property register, kept by the Bulgarian registry agency.
Taxes and duties on the property
Both for the acquisition of farmland and for the acquisition of a residential property, a real estate transfer tax has to be paid to the responsible municipality as a one-off payment. The tax varies for the different municipalities between 2.2% and 3% of the purchase price. This tax is due by the buyer at the time of the notary transaction. In addition, notary fees are incurred, the amount of which is based on the property purchase price, which must not be less than its tax assessment, and a registration fee of 0.1% shall be also paid to the Bulgarian registry agency.
As mentioned above, there are no municipal taxes for owning of farmland, provided that no agricultural building has been built on it. For residential properties, on the other hand, both a municipal tax and a garbage fee, the amount of which is determined by the municipality authorities, shall be paid.
Taxation on the sale of real estates
In generally, natural persons also have to pay an annual tax of 10% on the profit from the sale. The taxation is regulated by the Bulgarian Income Tax Act for Individuals, which also contains the exceptions, whereas no taxes are due, as follows:
- for sales or swaps of one residential property during the tax year, provided that more than 3 years have been elapsed between the date of the purchase and the sale or the swap of the property;
- for sales or swaps of up to two residential properties during the tax year, as well as for sales or swaps of farmland and forestry land, regardless of the number of the properties - provided that more than 5 years have been elapsed between the date of the purchase and the date of the sale or the swap.
For residential properties this period commences at the earliest as of the day the building is put into exploitation (Certificate no.16), even if the property was acquired at an earlier point in time (e.g. when the property was acquired after the completion of the building shell).