The cadastral value of housing in Moscow will rise. What it means

From 2022 the cadastral value of housing in Moscow will rise by 21.4% on average (to 181,000 roubles per 1 sq. m) compared with 2018, when the state cadastral valuation was last carried out.

Together with experts, we look at whether this rise matches market indicators, and how the increase in cadastral value will affect the tax payments of Moscow residents.

The cadastral jump

A rise of 21.4% is very steep, especially in percentage terms against the previous cadastral valuation, says Kirill Kulakov, the Moscow public commissioner for forensic examination, cadastral valuation and challenges to cadastral value. In his words, fluctuations in cadastral value on this scale have not been seen before.

"But this jump is entirely explicable. Above all, by the explosive growth of prices on the housing market in 2020. A longer interval also had an effect: three years instead of two between state cadastral valuations, because last year Moscow cancelled approval of the results," he explained.

What is a cadastral valuation for?

A cadastral valuation is the official valuation by which the state determines the price of a particular property. Cadastral value is needed in order to calculate the property tax, to calculate the tax on a purchase and sale (a lease, or an exchange of housing), to formalise a right of inheritance in housing, to formalise a deed of gift for real estate, and so on.

Cadastral valuation is carried out at set intervals. In Moscow, for example, the law allows it to be carried out at an interval of two to five years. The previous state cadastral valuation in the capital was in 2018. Then, on average across Moscow, the cadastral value of capital construction projects increased by 2.5%, and that of land plots by 1.5%.

Under the plan, a cadastral revaluation of residential and commercial real estate was to take place in 2020. Preliminary calculations at the time suggested that the cadastral value of real estate would rise by about 3%. The Government of Moscow postponed it because of the pandemic and the difficult economic situation. Property tax for 2021 was calculated using the cadastral value of properties as of 2018.

Cadastral valuation is a mass valuation of real estate, calculated under an approved methodology. Not every parameter that affects the price of a property on the market is included in the cadastral valuation methodology. Because of this, market value and cadastral value can differ substantially for some properties. There can also be errors in the source data. For example, the distance from the property to transport or utility infrastructure may be stated incorrectly. That, too, will affect the calculation of the property's cadastral value.

If an owner finds a significant discrepancy between the old and the new cadastral value with no objective reason (for example, a new metro station has opened next to the building), the proper way to challenge the valuation is to do so before it is approved. Very little time is left for that, until 19 October 2021. It can still be challenged afterwards, but that will take longer and will be more difficult.

"When the cadastral value of properties falls sharply, one may suppose that the property is planned for compulsory acquisition for the city's needs. More often, though, the value rises. That makes it possible to increase the property tax, which is calculated on the basis of cadastral value," said Yulia Patseliya, an expert in corporate real estate management.

Market and cadastral valuation

A cadastral valuation is supposed to be carried out in line with market indicators. Its figures are usually below the market. According to Consul Group, the cadastral value of 99% of residential flats will increase compared with the cadastral value approved in 2018. That growth will be smaller than the real rise in flat prices in Moscow over the same period (from 2018 to 2021), noted Sergei Pivovarchik, managing partner of Consul Group. In the Southern Administrative District, for example, cadastral value will rise by 21% on average across the district, while market prices of flats rose by 31% from 2018 to 2021.

According to CIAN, the cadastral valuation as at 2018 was on average 25% below market prices in the capital, and in the "2022 version" it will be 36% below the market, although comparing the movement of cadastral and market prices directly is not always sound. In the first case the task is to value every building, from the most dilapidated to the most expensive new build, whereas the sample behind market prices is substantially skewed towards recently completed new buildings.

"This is why cadastral prices rose by 21% over three years, while average market prices rose by more than 40%, and in New Moscow by almost 60%," said Alexey Popov, head of CIAN's analytical centre.

The ratio of the cadastral value of housing in Moscow for 2022 to market value, according to the state budgetary institution Centre for Property Payments and Housing Insurance and to CIAN, is available at this link.

How cadastral value differs from market value

The difference between cadastral value and market value is that the calculation of the former does not take individual characteristics into account, for example the condition of the renovation and the plumbing, the view from the window, and others. Unlike market value, cadastral value is set by the mass-valuation method, which is carried out on the basis of segmenting and grouping properties according to the type of real estate and the influence of economic and price-forming factors. When the value of real estate is determined by that method, it differs from the market value.

What will happen to taxes?

"The cadastral value of housing is the tax base for property tax. The tax burden on Moscow residents may therefore rise in proportion to the increase in cadastral value, by more than 20%. The rise may also be smaller, because of the deductions and tax relief applied in calculating the tax base," explained Tatyana Shkolnaya, deputy director of the Institute of Tax Management and Real Estate Economics at the National Research University Higher School of Economics.

"In addition, a rule is now in force under which the property tax of individuals cannot rise by more than 10% over the equivalent amount for the previous year, regardless of the growth in cadastral value at the next state cadastral valuation, so owners of housing, unlike owners of commercial real estate, have no great cause for concern," noted Kirill Kulakov.

Whatever the percentage by which the cadastral value rises, the increase in tax will be gradual. Each year +10% will be added until the full amount of tax is calculated,

added Sergei Pivovarchik of Consul Group.

Property tax of individuals is payable no later than 1 December of the year following the expired tax period. Individuals will have to pay the property tax (on flats and parking spaces) on the new cadastral value by 1 December 2022. The tax notice of the amount of tax for 2021 will arrive around October 2022.

The cadastral revaluation will affect the tax payments of owners of commercial real estate to a greater extent. According to the draft report of the Centre for Property Payments and Housing Insurance, cadastral value will increase for almost all properties.

"For commercial real estate (offices and retail) the increase will average 7-8% across Moscow, although there are quite a few specific examples of growth of 40-50%," noted Kirill Kulakov.

How to calculate the tax on a flat in 2022?

The tax is calculated as the product of the cadastral value of the property, reduced by the tax deduction, and the percentage rate, which depends on the type of real estate. For flats the rate ranges from 0.1% to 0.3% (depending on the value); if a flat is worth more than 300 million roubles, the rate is 2%.

As an example, Consul Group took a real flat in Moscow (the Northern Administrative District) of 50 sq. m. Its current cadastral value is 7,938,009.00 roubles, the tax rate is 0.1%, and the tax payable is 7,938.01 roubles a year (without tax deductions and other relief). Taking the revaluation for 2022 into account, the cadastral value of the flat will be 9,380,081.50 roubles. The tax rate will not change, at 0.1%, so the property tax payable will be 9,380.08 roubles a year.

Given the ban on raising the tax by more than 10%, the tax the owner of this flat will have to pay in 2022 will rise not to 9,380 roubles but to 8,732 roubles (7,938 + 10%). The owner of this flat will pay 794 roubles more in property tax in 2022 than for 2021. Per month, that is about 66 roubles more.

It is worth noting that in 2023 the owner of this flat will already pay the full amount of 9,380 roubles, because relative to 2022 (8,732 roubles) that amount is less than 8,732 roubles + 10%.

If we set aside the question of "will this owner's tax increase" and look at the actual market value of this flat, it turns out to lie in the range of 16-19 million roubles. The new revaluation results should not be judged only through the prism of "has it risen relative to the previous value". Most flats in Moscow are undervalued, which gives owners of housing the chance, gradually and over many years, to come to the obligation to pay tax on the real value of the flat,

in the view of Sergei Pivovarchik.

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