What is the difference between value-added tax on residential and commercial property?
Many people ask: Are all properties subject to tax? The answer: No, there is a big difference between residential and commercial property. One of the most important amendments that occurred in October 2020 is that the General Authority for Zakat, Tax, and Customs (ZATCA) exempted the sale of most properties from value-added tax, and instead, introduced a 5% “real estate transaction fee”. However, rental and leasing have different rules.
First: Residential Property (Private Housing)
Sale: The sale of residential property (villa, apartment, residential building) is 100% exempt from value-added tax. This means that if you buy a house or apartment from a person or company, you will not pay 15% value-added tax. Instead, you will pay 5% real estate transaction fees (also known as RETT).
Rental: Renting residential property for residential purposes is completely exempt from value-added tax. This means that if you rent an apartment and live in it, there is no tax on the rent.
Important exception: Short-term accommodations (such as hotels and serviced apartments) are treated as commercial and are subject to a 15% tax.
Second: Commercial Property (Offices and Stores)
Sale: The sale of commercial property (offices, warehouses, commercial stores) is exempt from value-added tax in terms of sale. Like residential property, it is subject to 5% real estate transaction fees.
Rental: Here is the fundamental difference! Renting commercial property is subject to a 15% value-added tax. This means that if you rent an office or store, you will pay 15% tax on top of the rent value. This includes:
- Administrative offices
- Commercial stores in malls
- Warehouses and storage facilities
- Buildings under construction (sale from the plan)
- Empty land designated for investment
Third: Land and Properties Under Construction
- Empty land: Its sale is exempt from value-added tax (subject to 5% real estate transaction fees).
- Property under construction: If the developer is qualified, they can recover the value-added tax on construction costs through a special refund program.
- First-time buying a house: A Saudi citizen who buys their first home can recover the value-added tax they paid on the purchase of the new property (if it is subject to tax).
Fourth: When do you pay 15% value-added tax on property?
15% is applied in two basic cases:
- Renting commercial property (renting offices, stores, warehouses)
- Selling new property from an unqualified developer or selling properties as part of an ongoing economic activity (rare after the 2020 amendment)
In summary: If you are looking for a home for yourself — residential property is exempt from tax on sale and rent. And if you are a businessman who wants to rent an office or store — you should expect to pay 15% value-added tax on the rent. The difference is simple but very important for financial planning.
Frequently Asked Questions
Q: Is the sale of a house or apartment subject to 15% tax?
A: No, the sale of residential property is exempt from value-added tax. The fees you pay are 5% real estate transaction fees.
Q: Is residential rent subject to tax?
A: No, residential rent is exempt from value-added tax.
Q: Is renting a commercial store subject to tax?
A: Yes, renting commercial stores, offices, and warehouses is subject to 15% value-added tax.
Q: How do I recover value-added tax as a citizen buying their first home?
A: A Saudi citizen who buys their first home can apply to the General Authority for Zakat, Tax, and Customs (ZATCA) to recover the tax. Visit the website zatca.gov.sa.
Q: Are hotels and serviced apartments subject to tax?
A: Yes, short-term stays in hotels are treated as commercial and are subject to a 15% tax.
Q: What is the difference between value-added tax and real estate transaction fees?
A: Value-added tax is 15%
