Introduction

In principle, all sales of real estate are taxable. As of 2022, capital gains tax is 22%. Considering the record-high increase in property values we have seen over a number of years, a tax of 22% will amount to a very high sum for many sellers of, for example, homes and cabins.

Fortunately, we have exemption rules which in practice mean that the vast majority of people who sell their home or cabin are exempt from tax.

The rules may sound simple, but there are some discretionary elements that are important to be aware of.

How is any tax liability calculated?

Before we take a closer look at the conditions that must be met in order to avoid tax, it may be useful to know how any tax is calculated.

The most important thing to note is that we are talking about capital gains tax. This means that it is not the sale price that is used to calculate the tax, but rather the profit (gain) you make, which may be taxable.

Profit = initial value – sale price. If you paid NOK 500,000 for the cabin and sell it after a few years for NOK 750,000, you have made a profit of NOK 250,000. If you do not meet the requirements for tax exemption, the tax will amount to NOK 250,000 x 22% = NOK 55,000.

If the gain is taxable, a loss will be deductible.

Exemption from capital gains tax

If you want to sell your home and avoid paying tax, you must have owned the property for at least one year and used it as your own residence for one of the last two years. The last part of the sentence may seem somewhat confusing at first glance – why does it mention two years when it states immediately before that it is sufficient to have owned the property for one year?

The provision means that Kari can buy an apartment on July 1, 2020, and use it as her own residence until July 1, 2021. She then moves in with her boyfriend and continues to live there. On February 1, 2022, she sells the apartment. Kari had then fulfilled the requirements for both ownership and residence, even though she had not lived in the apartment during the last year prior to the sale.

For vacation homes, the requirements for ownership and residence have been extended to 5 years and 8 years, respectively. For a cabin, it is of course not required that you have used it as a residence. What you must be able to document is that the cabin has been used as a vacation home every year and that you have spent a reasonable number of days there. Here, the assessment is more discretionary and must be made on a case-by-case basis.

Once you have understood how to calculate both ownership and residence periods, an even greater challenge may arise: When did the ownership period start, and when did it end?

When does the ownership period start?

The legal basis for not calculating tax under the above conditions can be found in Section 9-3 of the Tax Act. However, the Tax Act does not contain a definition of the term "owned property."

Many people believe that you only become the owner of a property once you have received a registered deed in your own name. This is not correct. The Norwegian Tax Administration provides the following definition on its website:

The period of ownership is calculated from the date on which you acquired (purchased, inherited, received as a gift) the property. As a general rule, you are considered the owner from the date on which you took actual possession of the property.

Now, many people will surely ask what "actual control..." means. This is also a discretionary term. It means that an overall assessment must be made of whether the person who claims to have become the owner at a certain point in time—we will call him the Buyer—also assumed so many rights and obligations that it is natural to consider him the owner.

In such an assessment, it will of course be crucial whether the buyer has obtained registered title to the property. If he has, it will take a lot for the period of ownership not to be calculated from the date of registration. It may be possible to argue for a date further back in time.

Many people postpone registration in order to save the document duty of 2.5% of the purchase price, especially if they plan to sell the property in the foreseeable future. In such cases, a number of individual factors must be considered in order to determine whether the buyer has become the owner for tax purposes. This will typically include the following:

• Has the buyer listed the property in their own tax return?
• Has the buyer assumed responsibility for paying municipal fees and property tax?
• Have subscriptions for electricity, data lines, alarm systems, etc. been taken over by the Buyer?
• Can the buyer document that he has used the property, e.g. through photos, renovation work and other investments in the property, confirmation from the board of the co-ownership association, etc.?
• If it is a vacation home, it may be worthwhile to document travel to and from the location, as well as your stay there, preferably through bank statements showing transactions at local stores, visits to local restaurants, etc.

To avoid uncertainty and unpleasant surprises, we recommend that you obtain a binding advance ruling from the Tax Administration in cases of doubt. This means that, for a modest fee, the Norwegian Tax Administration will assess the tax implications of a specific transaction – e.g. whether a property sale under certain conditions will trigger a tax liability or not. You can then choose whether or not to use the ruling, but it is binding on the Norwegian Tax Administration.

If you request such an advance ruling, it is very important that the facts are described accurately, as the Tax Administration will base its ruling solely on the information you provide.

When does the ownership period end?

At the opposite end of the ownership period, it is also up to a discretionary assessment to determine when a change in ownership occurs. Here too, there is no single event that determines the question.

The Norwegian Tax Administration states on its website:

If the realization takes the form of a sale, the property is considered realized at the time a complete agreement on the transfer has been entered into. An agreement is complete when the buyer and seller have agreed in a binding and final manner that the property is to be transferred and on the most important terms of the transfer. The time of realization will therefore normally be the day on which the offer is accepted.

The idea that an offer can be considered a "complete agreement" probably sounds a little strange to most people. However, there is no doubt that ownership ceases when the seller accepts an offer. Even though a number of issues remain to be clarified, such as the date of transfer, the seller (and buyer) are bound as soon as the offer is accepted.

If the property is sold privately and outside of a bidding process, the seller will naturally be considered bound at the moment he signs a sales agreement.

Summary

The rules regarding tax liability in connection with the sale of real estate may seem simple on the surface, but they contain some elements that are crucial to be aware of.

To avoid having to pay 22% tax on a significant gain, it may be a good investment to seek advice from someone who can assist you throughout the process.

Real estate is one of our main areas of focus. I have extensive experience in similar cases and can offer skilled and cost-effective assistance. Feel free to contact me by phone for a no-obligation consultation!