KTM Petra Lyly väittelee Vaasan yliopistossa 15. joulukuuta 2021. Kuva: Riikka Kalmi

Dissertation: The tax exemption for capital gain and the first home transfer tax exemption are unnecessarily broad

The tax exemption for the gain on the transfer of one's own home and the transfer tax exemption for a first home should be specified, says Petra Lyly, who is defending her dissertation at the University of Vaasa.

Lyly points out that the owner-occupied home capital gain tax exemption has taken shape as a broad subsidy due to a law dating back to the 1980s. At that time, the point was removed from its definition, according to which the tax exemption was only possible if the flat was sold immediately after the end of one's own personal housing. Today, the tax exemption is still valid after a long time after the end of your own housing use.

First home tax exemption is difficult to foresee, which is not desirable for tax expenditure on self-taxation. There is also an inaccuracy in the statistics of tax subsidies — the legal basis for the tax exemption for housing income is unclear, which should be abandoned, but the tax exemption should be saved unchanged.

Petra Lyly's doctoral research focuses on home tax expenditures in Finland, which are for example owner-occupied home capital gain tax exemption, first home transfer tax exemption, mortgage interest deduction, housing imputed income tax exemption and household tax deduction. These expenditures cause over 6-billion-euro tax revenue loss every year.

The conditions for the first home transfer tax exemption are unclear

First home transfer tax exemption is subject to requirements on age, your own housing and previous home ownership. However, the conditions for tax exemption are unclear in the present forms. They should be clarified by specifying the law in such a way as to remove the interpretation problems.

Now you can get the asset transfer tax exemption up to ten years after you buy a flat, as long as there are self-independent reasons for delaying your own use of housing. Reasons may naturally include delays in land use planning or building permission, but flat renting has also, in some cases, been seen as a tax-exempt enabling reason for delaying your own housing use.

Since the transfer tax is considered a tax that makes it difficult to change and increase the lock-in effect, it would also be possible to unify the level of transfer tax below the current level, while eliminating the tax exemption for the first homes. However, a one-time abolition of the transfer tax would hardly be possible because the tax is fiscally significant.

There will still be 5 per cent of interest deductible capital income on mortgage debt in 2022, but after that the interest deduction will go away from taxation. Tax expenditure has been reduced since 2012. Eliminating the interest deduction is justified, because interest on mortgage debt is directed towards housing income, which is tax-free. However, interest rates may have been deducted from capital income and, in the form of a deficit credit, personal income as well. Moreover, the current level of interest rates is so low that it is difficult to find real barriers to eliminating the interest deduction. In the past, a buyer of the first home has also taken advantage of the increased deficit credit for personal income taxation, which will naturally be eliminated when the interest deduction leaves.

The buyer of the first home will still be supported in the form of an ASP loan — but will the buyer of the first-home be left entirely without tax support from 2023 when the interest deduction, and possibly the first home transfer tax exemption, would go away? Petra Lyly suggests a solution for this.

– In the 1990s, the housing deduction was applied as an alternative with the interest deduction. The housing deduction at the time was a neutral tax equilateral deduction, decreasing annually. It was obtained for ten years after buying home regardless of the form of funding for the flat. Its conditions were the same as the conditions for first home transfer tax exemption today. I wonder if this type of tax expenditure would be a possible form of homebuyer support these days, says Lyly.

The impacts of the increased tax deduction should be assessed immediately

The increased household tax deduction, which will take effect in Finland in early 2022, allows for increased tax support for the waiver of oil heating. In the same context, a two-year trial of the increased reduction in household and care work will also be carried out. Data on the effects of the household deduction are contradictory. According to some studies, the reduction has been found to have a significant impact on employment in the household services sector, but other studies suggest that it would have no impact on demand and employment for household services, and neither the grey economy. However, the datasets and methods of the studies differ, and it is unclear whether the said studies accurately describe the current period after the pandemic sufficiently.

One objective of the increased household tax deduction is to examine the employment impact of the reduction in the areas of household and care services. Studies assessing the employment impact of the deduction should be started as quickly as possible already during or immediately at the end of the experiment.

Household support for low-income earners has also been mentioned in the context of the household tax deduction, which would be aimed at strengthening the ability of low-income earners to take advantage of private household and care work services as well. It would be possible to implement the aid as a negative income tax linked to the household tax deduction or as a form of direct aid administered by, for example, Kela.

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Petra Lyly
Petra Lyly, photo by: Riikka Kalmi

Doctoral dissertation

Lyly, Petra (2021) Kodin verotuet – tavoite, normi ja vaikutus. Acta Wasaensia 476. Väitöskirja. Doctoral dissertation. Vaasan yliopisto. University of Vaasa.

Publication pdf: http://urn.fi/URN:ISBN:978-952-476-997-6

Public defence

The public examination of M.Sc. Petra Lyly’s doctoral dissertation ”Kodin verotuet – tavoite, normi ja vaikutus” will be held on Wednesday 15.12.2021 at 12 at the University of Vaasa, auditorium Nissi.

Participation for the event is also possible online:
https://uwasa.zoom.us/j/63817078294?pwd=akVLcXcrOFRxcG90YnZEcU5LYWNVdz09

Professor (emeritus) Esko Linnakangas (University of Helsinki) will act as an opponent and Professor Juha Lindgren as custos. The defence will be held in Finnish.

At all public events held indoors at the university, such as public examinations of doctoral dissertations, a COVID-19 passport is required of outside participants over the age of 16. This does not apply to staff. Read further instructions on the university's website.

Further information

Petra Lyly, tel. +358 400 875 471, email: petralyly@icloud.com

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