Chronicle of an announced growth: after the fiscal blow given to consumption and investments, it’s now the turn of properties

Author: Alex Milcev, Partner, Leader of the Tax and Legal Assistance department, EY Romania

The saying goes that trouble never comes alone. And it is true, here, more than ever, exactly where it hurts: in the taxes and fees that the taxpayer must pay to the state. We had somewhat gotten used to the avalanche of tax increases, legislative “packages” counted (we are already at number 3!), but we still have something that is talked about less than it should be.

We are talking about the reform of local taxes or property taxes – houses, land, cars, etc. It is certain at this point that, starting next year, local taxes in Romania will increase significantly, based on a postponed measure, but provided for in the commitments assumed by the Romanian state through the PNRR – the broader fiscal reform component. The European Union requires the increase of local budget revenues, including by updating the taxable value of properties, so that taxation better reflects the real market value, brings higher revenues at the local level and reduces, generally speaking, the need for financing from the central budget and the related fiscal distortions.

The measure, scheduled to be applied from January 1, 2026, was postponed from the summer of 2022 in the context of inflation, post-pandemic economic instability and then the 2024-2025 electoral years. However, we are now entering a straight line with these legislative measures, with the approval of the Fiscal Measures Package no. 1 proposed by the Bologna government. The form of the new legislation is not yet final, but, according to official statements, all the details regarding the technical procedures, applicable percentages, (re)definition of the taxable base, etc., should be finalized by the end of August.

Basically, we are talking about two important elements that change the paradigm of local taxes, reflected in the current wording of the law. On the one hand, the tax intervals are modified, by eliminating the maximum ceiling, with only a minimum being established – 0.1% for residential, 0.5% non-residential and 0.4% in the case of buildings used for agricultural activities. Local authorities will be able to adjust the tax flexibly, without requesting supplements from the national budget. On the other hand, the definition of the base will change, which will come to better reflect the market value of the real estate.

Currently, the tax on residential buildings owned by individuals is calculated by applying a rate between 0.08% and 0.2% on the taxable value of the building, which can be adjusted depending on the rank of the locality and the location area. For legal entities, the rates are between 0.08% and 0.2% applied to the taxable value of the building, and for non-residential buildings between 0.2% and 1.3% are applied to the taxable value of the building. The rule of establishing the tax based on the evaluation report prepared by an authorized appraiser every five years applies. It should be noted that currently the methodology imposed by law for these evaluations often does not reflect market values.

It is important to say here that this step, which we can consider a kind of “revolution” of the local tax system in Romania, was going to be taken anyway. Unfortunately, it coincided with this difficult fiscal situation of other tax and duty increases and thus will have a negative compound effect on all taxpayers.

Let us not forget, in this context, the so-called luxury tax – the special tax applicable to homes valued at over 500,000 euros and cars over about 75,000 euros. The introduction of an additional tax burden is also being discussed for these types of properties.

It is possible that this increase in local property taxes will also produce a “downsizing” phenomenon, more pronounced in developed countries, where owners give up houses and large areas, sell them and move to smaller, more lightly taxed spaces. Property taxes in these economies are very high compared to Romania.

Therefore, if this phenomenon has not been very evident in Romania so far, and also because of the “owner-to-the-last” mentality of the Romanian, who leaves houses and land to his descendants, but also because taxes are still quite low, it is likely that next year we will witness an increase in this “step back”. Not only that, but we also have a historical precedent:

in the early 2000s, when, in a completely different economic context (of a fulminant increase in real estate prices), many families with low incomes or in financial difficulty sold their well-located properties in big cities and opted for properties on the outskirts or even outside them, leaving with a good difference in money.

In the case of legal entities, there will be higher costs for owning and using real estate assets, and an indirect impact on rents that will increase will be felt everywhere. It is possible that the increase in local taxes from January 1, 2026 will not only be a momentary economic decision, but even a step that will change the mindset and behavior of the Romanian owner and will redefine what a real estate investment means.