Besides the ownership rights over real estate, a rather common and strong, although arguably somewhat outdated legal concept is the right of the usufruct or as other Anglosaxon regions call it, the life-estate.
What is usufruct or life-estate?
Under the life-estate rights a person, other than the owner has the right to enjoy all use and benefits of the real estate for a certain amount of time which may be defined by an exact date or for a lifetime or under ceratin other, yet distiguished conditions, such as the commencement of a marriage.
Traditionally such rights were established to make sure that when a child inherits or is gifted a property that such real estate cannot be transferred without the approval of the parents or grandparents, whereas although legally a real estate burdened with such life-estate may of course be transferred, however such legal right burdens the ownership rights to the highest degree and therefore, the legal title of the ownership should be made encumbrance free latest upon the transfer of the ownership.
The value of life-estate rights
Based on the pertinent legal provisions as stated among the deifinitions of personal income tax rules, life estate rights are deemed and declared as rights bearing monetary value.
As such, upon the transfer or even the waiver of such rights upon the sale and purchase of a property burdened by usufruct rights will also lead to an obligation to pay duty.
The general, onerousness monetary duty to be paid after the sale and purchase of real estate is 4% of the value of the property.
Of course many exemptions and benefits are available based on the law, however in general in order to be able to determine the annual value of monetary rights such as usufruct, 1/20th part of the real estate value bearing such encumbrance should be taken into consideration.
If the usufruct right is concluded for a lifetime, then the age of the entitled person bearing rights of the use and benefits of the real estate will determine the value to be used in order to calculate the actual monetary worth, which will serve as basis for the duty fee as follows:
- Person entitled is younger than 25 years old – 10 times the annual value;
- Person entitled is between 25-50 years old – 8 times the annual value;
- Person entitled is between 51-65 years old – 6 times the annual value;
- Person entitled is older than 65 years old – 4 times the annual value.
Based on the above, the law provides the methodology to calculate the amount that should be reflected in the purchase price as well as in the form to be sent to the Tax Authority in order to properly determine the value of the usufruct right in order to waive such right and purchase a real estate emcumbrance free, whereas a litigation, encumbrance and burden free legal title is arguably the most important factor in real estate transactions.
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