The real estate market in Saudi Arabia is one of the most important sectors undergoing rapid development. Therefore, real estate valuation has become an important tool not only in the buying and selling process but also in determining tax liabilities.
Real estate valuation helps determine the true value of a property, which in turn allows for accurate calculation of the tax due. It also protects both investors and the state from any miscalculations, as it contributes to determining the true value of the property, thereby accurately calculating the tax due and protecting both the investor and the state from any inaccurate estimates.
In this article, we will explore the significance of real estate valuation in determining taxes and the process by which it is carried out.
What is the real estate tax in Saudi Arabia?
The Kingdom of Saudi Arabia has established clear regulations governing taxes and fees related to real estate. These regulations ensure that the tax value is calculated in accordance with fair principles and approved standards. Real estate taxes in Saudi Arabia vary, and each type is subject to a specific legal framework supervised by the relevant official authorities, which are:
- Real estate transaction tax: This tax was imposed by Royal Decree No. (A/84) dated 14/2/1442 AH. It is a tax of 5% of the value of the real estate when it is sold or transferred, including the land and everything built or constructed on it. It is paid before or during the transfer of ownership or the notarisation of contracts.
- Zakat on real estate: This is a legal obligation and a mandatory financial system in the Kingdom of Saudi Arabia, imposed on companies and institutions, not individuals, for sale or trade, at a rate of 2.5% of its annual value. Real estate owned by individuals for personal use is not subject to zakat.
It is thus clear that real estate taxes in the Kingdom combine real estate transaction tax and zakat, which is applied to investment properties owned by companies, reflecting the state’s keenness to regulate the real estate market.
Why do we need real estate valuation for tax purposes?
Real estate valuation for tax purposes is a key tool that government agencies use to figure out how much tax to charge on properties. Accurate valuation lets tax authorities calculate the true value of a real estate and estimate the amounts owed in a fair and transparent way.
Conversely, any error or shortcoming in the valuation process may lead to an unfair assessment of tax, either by overestimating or underestimating it, which may undermine the principle of tax fairness and affect state revenues. Therefore, accurate real estate valuation is considered the cornerstone of ensuring a balance between the rights of the state and the rights of taxpayers.
How is the value of a real estate assessed?
After discussing the importance of real estate valuation in determining taxes, the most important question remains: how is the valuation process carried out? To obtain an accredited real estate valuation, you must find an accredited real estate valuer or a real estate valuation company accredited by the Saudi Authority of Accredited Valuers. This ensures accuracy and fairness in determining the value of the real estate and is done based on the following steps:
– Information gathering:
This stage is the first step in the valuation process, where the real estate valuer collects all data related to the property, such as its geographical location, area, type, age, and structural condition, in addition to the surrounding facilities and services. Any features or defects that may affect its market value are also noted. One of the most important things at this stage is for the client to provide all data related to the real estate and clarify the purpose of the valuation.
– Field inspection:
The real estate valuer visits the real estate to inspect it on the ground, assessing its location and proximity to essential services, the quality of construction and finishes, and whether the real estate needs maintenance work. They also review official documents such as the title deed and building permits to ensure that the real estate is legally sound and free of disputes. This step ensures that the valuation is based on accurate and reliable data.
– Choosing the appropriate valuation method:
There are several approved methods of real estate valuation, such as the income approach, the cost approach, and the comparative approach. The valuer chooses the most appropriate method according to the nature and condition of the property, and sometimes may use more than one method to arrive at a more accurate result.
– Preparing the final report:
At the end of the process, the accredited real estate appraiser issues an official report specifying the market value of the real estate at a specific time. The report contains detailed data on the property, the purpose of the valuation, the methodology used, and the factors affecting the value. This report is considered a basic document that can be relied upon by official authorities or in commercial transactions.
These are the main steps for obtaining a real estate valuation, from gathering information and conducting a field inspection to preparing the final report, ensuring that the calculated value is accurate, which makes it a reliable basis for official authorities in determining tax obligations.
In conclusion, real estate valuation plays a fundamental role in ensuring tax fairness, supporting investment decisions, and protecting the rights of both the state and investors, as accurate valuation not only determines the true value of the real estate but also reflects market stability and builds trust. If you are looking for an accredited real estate valuer or a real estate valuation company, contact now with Aain Real Estate Valuation and get an accredited report that gives you a clear picture.