How tax policies create unexpected results when interest rates are low: A case study of Finnish housing company debt and private investor return¹

First, gross profits from letting a house in the year following are: (1) Pr=R−M−F−C {P_r} = R - M - F - C

Where

P_r = profits from letting a flat

Although maintenance costs and rental income are linked to each other and ownership time, they are treated as constants in this article as ownership time is relatively short, less than ten years. Rental income is supposed to be constant for the sake of simplicity (see, for example Blazenko and Pavlov, 2004). However, taxable profit is based on whether financial costs are funded or recognised. Taxable profit might differ from gross profit due to taxation rules. I then compare taxable gross profits from letting a flat (TP_r) in cases where charges are recognised and where they are funded. In both cases, gross profits (P_r) are the same.

If charges are recognised (‘the first case’), taxable gross profits equal gross profits: (2) TPR1=Pr=R−M−F−C T{P_{R1}} = {P_r} = R - M - F - C

And if financial costs are funded, LLHC’s accounting, instead of charging (‘the second case’), is (3) TPR2=R−M−C T{P_{R2}} = R - M - C

Total profits (P₁) after taxes in the first case (equation 2) are: (4) P1=(1−TR)×TPR1=(1−TR)×Pr=(1−TR)×(R−M−F−C) \matrix{{{P_1}} \hfill & = \hfill & {\left( {1 - TR} \right) \times T{P_{R1}} = \left( {1 - TR} \right) \times {P_r}} \hfill \cr {} \hfill & = \hfill & {\left( {1 - TR} \right) \times \left( {R - M - F - C} \right)} \hfill \cr}

Where

TR = tax rate

And total taxes (T_T) in this case are: (5) TT1=TR×TPR1=TR×PR=(TR)×(R−M−F−C) {T_{T1}} = TR \times T{P_{R1}} = TR \times {P_R} = \left( {TR} \right) \times \left( {R - M - F - C} \right)

Total profit after taxes in the second case (equation 3) is: (6) P2=PR−TR×TPR2=R−M−F−C−TR×TPR2=R−M−F−C−TR×(R−M−C)=(1−TR)×(R−M−C)−F \matrix{{{P_2}} \hfill & = \hfill & {{P_R} - TR \times T{P_{R2}} = R - M - F - C - TR \times T{P_{R2}}} \hfill \cr {} \hfill & = \hfill & {R - M - F - C - TR \times \left( {R - M - C} \right)} \hfill \cr {} \hfill & = \hfill & {\left( {1 - TR} \right) \times \left( {R - M - C} \right) - F} \hfill \cr}

And total taxes in this case: (7) TT2=TR×TPR2=(TR)×(R−M−C) {T_{T2}} = TR \times T{P_{R2}} = \left( {TR} \right) \times \left( {R - M - C} \right)

As gross profits from both cases are the same, the difference between total profits from the first case (equation 4) and the second case (equation 6) is the difference in taxes paid according to equations 5 and 7: (8) P1−P2=TT2−TT1=TR×(R−M−C)−TR×(R−M−E−C)=TR×F \matrix{{{P_1} - {P_2}} \hfill & = \hfill & {{T_{T2}} - {T_{T1}}} \hfill \cr {} \hfill & = \hfill & {TR \times \left( {R - M - C} \right) - TR \times \left( {R - M - E - C} \right)} \hfill \cr {} \hfill & = \hfill & {TR \times F} \hfill \cr}

This means that the difference in total profits between these two identical cases differs based on how LLHC treats charges for financial costs in their accounting.

From the state’s viewpoint, there is also a difference in whether LLHC recognises or funds charges for financial costs. LLHC is taxed according to the corporate tax rate, which is 20% according to income tax law § 124. A private investor is taxed, as a function on the amount of income, according to the capital gains tax rate, which is between 30% and 34%. However, it is rare that LLHCs would pay taxes since they are not meant to make a profit. The building itself is so large a base for the depreciation that all ‘accidental’ profits can be written down at the end of the financial year (Tomperi, 2019, chapter 4). Therefore, from the state’s point of view, the total amount of taxes from income generation based on LLHC shares come only from private investors. Next, I shall show the total amount of taxes collected in cases where charges are either recognised or funded. In these cases, taxes are analysed from total ownership time when shares are sold at the end of ownership time.

In the first case, charges are recognised, and the flat is sold at the end of the ownership period. In the case of recognised charges, total taxes from letting during ownership time (T_TR1) are taxes paid from letting (T_T1) according to equation 5, multiplied by the ownership time O_T: (9) TTR1=OT×TT1=OT×TR×TPR1=OT×TR×PR=OT×(TR)×(R−M−F−C) \matrix{{{T_{TR1}}} \hfill & = \hfill & {{O_T} \times {T_{T1}} = {O_T} \times TR \times T{P_{R1}} = {O_T} \times TR \times {P_R}} \hfill \cr {} \hfill & = \hfill & {{O_T} \times \left( {TR} \right) \times \left( {R - M - F - C} \right)} \hfill \cr}

In this case, total taxes from sales of shares are: (10) TTS1=TR×TPs1=TR×(IS−A1−CS) {T_{TS1}} = TR \times T{P_{s1}} = TR \times \left( {{I_S} - {A_1} - {C_S}} \right)

Where:

I_s = income from selling the flat

Therefore, in this first case, total taxes over ownership time (T_T) are total taxes from letting (T_T1) added to total taxes from selling the flat (T_TS1): (11) TT1=TTS1+TTR1=TR1×(IS−A1−CS)+OT×TR2×(R−M−F−C) \matrix{{{T_{T1}}} \hfill & = \hfill & {{T_{TS1}} + {T_{TR1}}} \hfill \cr {} \hfill & = \hfill & {T{R_1} \times \left( {{I_S} - {A_1} - {C_S}} \right) + {O_T} \times T{R_2} \times \left( {R - M - F - C} \right)} \hfill \cr}

It is necessary to use different tax rates as it is likely TR₁ > TR₂ since it is easier to make larger taxable profits when selling a flat than from letting it. Higher yearly income is taxed on a higher rate of profits that exceed €30,000.

In the second case charges are funded and the flat is sold at the end of the ownership time. In the case of funded charges, total taxes from letting during ownership time (T_TR2) are taxes paid from letting (T_T2) according to equation 7, multiplied by the ownership time O_T: (12) TTR2=OT×TR×TPR2=OT×TR×(R−M−C) {T_{TR2}} = {O_T} \times TR \times T{P_{R2}} = {O_T} \times TR \times \left( {R - M - C} \right)

Furthermore, total taxes from share sales in the second case, in principle, are the same as in equation 10: (13) TTS2=TR×TPs2=TR×(IS−A2−CS) {T_{TS2}} = TR \times T{P_{s2}} = TR \times \left( {{I_S} - {A_2} - {C_S}} \right)

However, when funded financial costs are added to acquisition cost in the second case, acquisition cost in case 2 (A₂) equals the acquisition cost in case 1 (A₁), and the total taxable income from sales is actually: (14) TTS2=TR×TPs2=TR×(IS−A1−CS+OT×F) {T_{TS2}} = TR \times T{P_{s2}} = TR \times \left( {{I_S} - {A_1} - {C_S} + {O_T} \times F} \right)

Which makes total taxes in the second case: (15) TT2=TTS2+TTR2=TR1×(IS−A1−CS+OT×F)+OT×TR2×(R−M−C) \matrix{{{T_{T2}}} \hfill & = \hfill & {{T_{TS2}} + {T_{TR2}}} \hfill \cr {} \hfill & = \hfill & {T{R_1} \times \left( {{I_S} - {A_1} - {C_S} + {O_T} \times F} \right) + {O_T} \times T{R_2}} \hfill \cr {} \hfill & \times \hfill & {\left( {R - M - C} \right)} \hfill \cr}

Equation 15 would imply that if TR₁ = TR₂, then total taxes in equation 11 = total taxes in equation 15, T_T11 = T_T15. But since TR₁ > TR₂ is likely true, then T_T11 > T_T15. This means that recognising charges for financial costs would not benefit private investors owing to higher total taxes. It is necessary to note that although the real estate markets are not perfect due to asymmetric information and a low number of sales in relevant market sectors, this is not relevant for this study (Chau et al., 2010).

However, the situation changes when I take into account the last-mentioned tax rule: presumed acquisition cost. If a flat has been owned for over ten years, the presumed acquisition cost that can be used in taxation is 40% of the sale price due to the tax laws explained in section 2, which means that total taxes from sales are, in the first case where presumed acquisition cost is not applied, as follows: (16) TTS=TR×TPs=TR×(IS−A−CS) {T_{TS}} = TR \times T{P_s} = TR \times \left( {{I_S} - A - {C_S}} \right)

This applies only if: (17) 0.4×IS≤A 0.4 \times {I_S} \le A and in the second case where presumed acquisition cost is applied: (18) TTS=TR×TPs=TR×0.6×IS−CS {T_{TS}} = TR \times T{P_s} = TR \times 0.6 \times {I_S} - {C_S}

This is only applied if: (19) 0.4×IS≥A 0.4 \times {I_S} \ge A

Next, for the sake of simplicity, I assume that the debt-free price of LLHC shares has not changed during ownership time. After equation 35 it is explained how the increased price of LLHC would change the situation. Therefore, the sale income of shares is the acquisition cost added to financial costs that are incurred to repay the loan, which is the total yearly financial costs (F_T) without yearly financial costs that are used to pay interest F_I, and both are multiplied by ownership time O_T: (20) IS=A+OT×(FT−FI) {I_S} = A + {O_T} \times \left( {{F_T} - {F_I}} \right)

Presumed acquisition cost is used only when it is more profitable for the taxpayer. Therefore, it is used only if profits are over 60% of the sale price, meaning that the sale price must be at least 2.5 times higher than the acquisition cost meaning that the price increase should be 1.5 times the acquisition cost. Therefore, the presumed acquisition cost is not applied if: (21) 0.4×(A+OT×(FT−FI))≤A→OT×(FT−FI)≤1.5×A \matrix{{0.4 \times \left( {A + {O_T} \times \left( {{F_T} - {F_I}} \right)} \right) \le A} \hfill \cr {\to {O_T} \times \left( {{F_T} - {F_I}} \right) \le 1.5 \times A} \hfill \cr}

And it is applied if: (22) 0.4×(A+OT×(FT−FI))≥A→OT×(FT−FI)≥1.5×A \matrix{{0.4 \times \left( {A + {O_T} \times \left( {{F_T} - {F_I}} \right)} \right) \ge A} \hfill \cr {\to {O_T} \times \left( {{F_T} - {F_I}} \right) \ge 1.5 \times A} \hfill \cr}

In the first case where presumed acquisition cost is not applied, I use case the sale income from equation 20 and add it to equation 16 to get total taxes paid from sales in the first case: (23) TTS1=TR×TPs1=TR×(IS−A−CS)=TR×(A+OT×(FT−FI)−A−CS)=TR×(OT×(FT−FI)−CS) \matrix{{{T_{TS1}}} \hfill & = \hfill & {TR \times T{P_{s1}} = TR \times \left( {{I_S} - A - {C_S}} \right)} \hfill \cr {} \hfill & = \hfill & {TR \times \left( {A + {O_T} \times \left( {{F_T} - {F_I}} \right) - A - {C_S}} \right)} \hfill \cr {} \hfill & = \hfill & {TR \times \left( {{O_T} \times \left( {{F_T} - {F_I}} \right) - {C_S}} \right)} \hfill \cr}

In this case, the total profits from sales (P_S1) can be derived from equation 23: (24) PS1=IS−A−CS−TTs1=OT×(FT−FI)−CS−TR×(OT×(FT−FI)−CS) \matrix{{{P_{S1}}} \hfill & = \hfill & {{I_S} - A - {C_S} - {T_{Ts1}}} \hfill \cr {} \hfill & = \hfill & {{O_T} \times \left( {{F_T} - {F_I}} \right) - {C_S} - TR \times \left( {{O_T} \times \left( {{F_T} - {F_I}} \right) - {C_S}} \right)} \hfill \cr}

And in the second case where the presumed acquisition cost applies, sale profits can be derived from equation 18 and add sale income derived in equation 20 to it to get total taxes: (25) TTS2=TR×TPs2=TR×0,6×(A+OT×(FT−FI))−CS \matrix{{{T_{TS2}}} \hfill & = \hfill & {TR \times T{P_{s2}}} \hfill \cr {} \hfill & = \hfill & {TR \times 0,6 \times \left( {A + {O_T} \times \left( {{F_T} - {F_I}} \right)} \right) - {C_S}} \hfill \cr}

And total profits (26) PS2=IS−A−CS−TTS2=OT×(FT−FI)−CS−TR×(0,6×(A+OT×(FT−FI))−CS) \matrix{{{P_{S2}}} \hfill & = \hfill & {{I_S} - A - {C_S} - {T_{TS2}}} \hfill \cr {} \hfill & = \hfill & {{O_T} \times \left( {{F_T} - {F_I}} \right) - {C_S} - TR} \hfill \cr {} \hfill & \times \hfill & {\left( {0,6 \times \left( {A + {O_T} \times \left( {{F_T} - {F_I}} \right)} \right) - {C_S}} \right)} \hfill \cr}

Thus, I can define total profits during ownership time in four different cases. The cases are constructed by combining two different legal aspects that affect the tax treatment of LLHC investment: the decision between recognising and funding charges and whether the presumed acquisition cost applies.

FIRST OPTION: Charges for financial costs are recognized, and presumed acquisition cost applies. In this case, profits from sales (P_s1) come from equation 26 and profits from letting the flat from equation 4 (P_R1), multiplied by the length of ownership (in years). In this case, total profits are: (27) P1=PS1+PR1=OT×(FT−FI)−CS−TR1×(0,6×(A+OT×(FT−FI))−CS)+OT×(1−TR2)×(R−M−F−C) \matrix{{{P_1}} \hfill & = \hfill & {{P_{S1}} + {P_{R1}}} \hfill \cr {} \hfill & = \hfill & {{O_T} \times \left({{F_T} - {F_I}} \right) - {C_S} - T{R_1}} \hfill \cr {} \hfill & \times \hfill & {\left({0,6 \times \left({A + {O_T} \times \left({{F_T} - {F_I}} \right)} \right) - {C_S}} \right) + {O_T} \times \left({1 - T{R_2}} \right)} \hfill \cr {} \hfill & \times \hfill & {\left({R - M - F - C} \right)} \hfill \cr}

SECOND OPTION: Charges for financial costs are recognised, and the presumed acquisition cost does not apply. In this case, profits from sales (P_s2) come from equation 24 and profits from letting the flat from equation 4 (P_R1), multiplied by the length of ownership (in years). In this case, total profits are: (28) P2=PS1+PR1=OT×(FT−FI)−CS−TR1×(OT×(FT−FI)−CS)+OT×(1−TR2)×(R−M−F−C) \matrix{{{P_2}} \hfill & = \hfill & {{P_{S1}} + {P_{R1}}} \hfill \cr {} \hfill & = \hfill & {{O_T} \times \left({{F_T} - {F_I}} \right) - {C_S} - T{R_1} \times \left({{O_T} \times \left({{F_T} - {F_I}} \right) - {C_S}} \right)} \hfill \cr {} \hfill & + \hfill & {{O_T} \times \left({1 - T{R_2}} \right) \times \left({R - M - F - C} \right)} \hfill \cr}

THIRD OPTION: Charges for financial costs are funded, and the presumed acquisition cost does apply.

As charges need to be recognised in order to pay interest, there will be no interest part for charges, and they all increase the value of shares. In this case, profits from sales (P_R1) come from equation 26 without F_I, which means F = F_T, and profits from letting the flat (P_R2) come from equation 6: (29) P3=PS1+PR2=OT×F−CS−TR1×(0.6×(A+OT×F)−CS)+OT×((1−TR2)×(R−M−C)−F) \matrix{{{P_3}} \hfill & = \hfill & {{P_{S1}} + {P_{R2}}} \hfill \cr {} \hfill & = \hfill & {{O_T} \times F - {C_S} - T{R_1} \times \left({0.6 \times \left({A + {O_T} \times F} \right) - {C_S}} \right)} \hfill \cr {} \hfill & + \hfill & {{O_T} \times \left({\left({1 - T{R_2}} \right) \times \left({R - M - C} \right) - F} \right)} \hfill \cr}

FOURTH OPTION: charges for financial costs are funded, and the presumed acquisition cost does not apply. In this case, profits from sales come from equation 24 without F_I, which means F = F_T, and profits from letting the flat come from equation 6: (30) P4=PS1+PR2=OT×F−CS−TR1×(OT×F−CS)+OT×((1−TR2)×(R−M−C)−F) \matrix{{{P_4}} \hfill & = \hfill & {{P_{S1}} + {P_{R2}}} \hfill \cr {} \hfill & = \hfill & {{O_T} \times F - {C_S} - T{R_1} \times \left({{O_T} \times F - {C_S}} \right)} \hfill \cr {} \hfill & + \hfill & {{O_T} \times \left({\left({1 - T{R_2}} \right) \times \left({R - M - C} \right) - F} \right)} \hfill \cr}

In the comparison of profits from options one and two, where charges for financial costs are recognised, but presumed acquisition cost applies only in the first option, comparing profits between equations 27 (P₁) and 28 (P₂) can be discovered when P₁ > P₂ is true. It needs to be noted that tax rate for selling the flat (TR₁) is different for sales in different scenarios due to different acquisition cost and therefore different taxable profit. The tax rate for profits from letting a flat (TR₂) is the same for both scenarios as the applied tax rules are the same. This applies to all the following examples. (31) OT×(FT−FI)−CS−TR11×(0.6×(A+OT×(FT−FI))−CS)+OT×(1−TR2)×(R−M−F−C)>OT×(FT−FI)−CS−TR12×(OT×(FT−FI)−CS)+OT×(1−TR2)×(R−M−F−C)→−TR11×(0.6×(A+OT×(FT−FI))−CS)>−TR12×(OT×(FT−FI)−CS) \matrix{{{O_T}} \hfill & \times \hfill & {\left({{F_T} - {F_I}} \right) - {C_S} - T{R_{11}}} \hfill \cr {} \hfill & \times \hfill & {\left({0.6 \times \left({A + {O_T} \times \left({{F_T} - {F_I}} \right)} \right) - {C_S}} \right) + {O_T} \times \left({1 - T{R_2}} \right)} \hfill \cr {} \hfill & \times \hfill & {\left({R - M - F - C} \right) > {O_T} \times \left({{F_T} - {F_I}} \right) - {C_S} - T{R_{12}}} \hfill \cr {} \hfill & \times \hfill & {\left({{O_T} \times \left({{F_T} - {F_I}} \right) - {C_S}} \right) + {O_T} \times \left({1 - T{R_2}} \right)} \hfill \cr {} \hfill & \times \hfill & {\left({R - M - F - C} \right)} \hfill \cr \to \hfill & - \hfill & {T{R_{11}} \times \left({0.6 \times \left({A + {O_T} \times \left({{F_T} - {F_I}} \right)} \right) - {C_S}} \right) > - T{R_{12}}} \hfill \cr {} \hfill & \times \hfill & {\left({{O_T} \times \left({{F_T} - {F_I}} \right) - {C_S}} \right)} \hfill \cr}

It can also be noticed that TR₁ < TR₃ is true if the rest of the equation would be true without them as higher taxable profits mean a higher tax rate, and the remaining terms are both taxable profits, which are the only difference between these two cases. Therefore P₁ > P₂ is true if: (32) 1.5×A<OT×(FT−FI) 1.5 \times A < {O_T} \times \left({{F_T} - {F_I}} \right)

From this comparison, it can be seen that if charges are recognised, profits are higher in the option where presumed acquisition cost is applied if LLHC debt has been paid (O_T × (F_T − F_I)) 1.5 times the acquisition cost (1.5 × A). The same applies in a comparison of profits in cases where charges for financial costs are funded from equations 29 and 30, P₃ > P₄, if 1.5 × A < O_T × F. This case is not likely to happen. This would mean that the LLHC would have collected and funded 1.5 times more money than the LLHC shares’ market value including debt. It must be recalled that charges funded cannot be used to pay off debt or any other costs.

It is possible to illustrate the significance of debt with the following example: suppose an LLHC has debt equal to 80% of the flat’s value and interest rates are low. We take the flat’s debt-free market value, use the symbol M, and then with equation 32, present acquisition cost with 0.2M due to A representing debt-free value: (33) 1.5×0.2M<OT×(FT−FI)→0.3M<OT×(FT−FI) \matrix{{1.5 \times 0.2M < {O_T} \times \left({{F_T} - {F_I}} \right)} \hfill \cr {\to 0.3M < {O_T} \times \left({{F_T} - {F_I}} \right)} \hfill \cr}

If interest rates are low, F_I is close to zero. In that case, it is necessary only to levy charges for financial costs at a bit more than 30% of the flat’s debt-free market value to repay the loan to make 1.5 × A < O_T × (F_T − F_I) to be true. As the third option presented in equation 29 is an unlikely scenario, it would require a significant increase in apartments market price of substantial savings (previously funded charges) in an LLHC. It can be dropped out of the comparison. We are comparing the second option presented in equation 28 and the fourth option presented in equation 30 and then the first option presented in equation 27 and the fourth option presented in equation 30.

If and we compare the profits from cases where charges for financial costs are recognised, the presumed acquisition cost does not apply (P₂), charges for financial costs are funded, and presumed acquisition cost does not apply (P₄), we can find when P₂ > P₄ is true. In this case, all tax rates are different. (34) OT×(FT−FI)−CS−TR11×(OT×(FT−FI)−CS)+OT×(1−TR21)×(R−M−F−C)>OT×F−CS−TR12×(OT×F−CS)+OT×((1−TR22)×(R−M−C)−F)→OT×(FT−FI)−TR11×(OT×(FT−FI)−CS)+OT×(1−TR21)×(R−M−F−C)>OT×F−TR12×(OT×F−CS)+OT×((1−TR22)×(R−M−C)−F) \matrix{{{O_T}} \hfill & {\times \left({{F_T} - {F_I}} \right) - {C_S} - T{R_{11}} \times \left({{O_T} \times \left({{F_T} - {F_I}} \right) - {C_S}} \right)} \hfill \cr {} \hfill & {+ {O_T} \times \left({1 - T{R_{21}}} \right) \times \left({R - M - F - C} \right) > {O_T} \times F - {C_S}} \hfill \cr {} \hfill & {- T{R_{12}} \times \left({{O_T} \times F - {C_S}} \right) + {O_T}} \hfill \cr {} \hfill & {\times \left({\left({1 - T{R_{22}}} \right) \times \left({R - M - C} \right) - F} \right)} \hfill \cr \to \hfill & {{O_T} \times \left({{F_T} - {F_I}} \right) - T{R_{11}} \times \left({{O_T} \times \left({{F_T} - {F_I}} \right) - {C_S}} \right) + {O_T}} \hfill \cr {} \hfill & {\times \left({1 - T{R_{21}}} \right) \times \left({R - M - F - C} \right) > {O_T} \times F - T{R_{12}}} \hfill \cr {} \hfill & {\times \left({{O_T} \times F - {C_S}} \right) + {O_T} \times \left({\left({1 - T{R_{22}}} \right) \times \left({R - M - C} \right) - F} \right)} \hfill \cr}

This one is a bit trickier to compare owing to different tax rates. First, it can be seen that if charges for financial costs are funded, the sale price of the flat is a bit higher as the larger part of charges has been used to increase the flat’s value: OT×(FT−FI)<OT×F {O_T} \times \left({{F_T} - {F_I}} \right) < {O_T} \times F

However, this difference is reduced owing to differences in tax rates of sales: TR11×(OT×(FT−FI)−CS)<TR12×(OT×F−CS) T{R_{11}} \times \left({{O_T} \times \left({{F_T} - {F_I}} \right) - {C_S}} \right) < T{R_{12}} \times \left({{O_T} \times F - {C_S}} \right)

Rental income also differs: OT×(1−TR21)×(R−M−F−C)>OT×((1−TR22)×(R−M−C)−F) \matrix{{{O_T}} \hfill & \times \hfill & {\left({1 - T{R_{21}}} \right) \times \left({R - M - F - C} \right)} \hfill \cr {} \hfill & > \hfill & {{O_T} \times \left({\left({1 - T{R_{22}}} \right) \times \left({R - M - C} \right) - F} \right)} \hfill \cr}

First, it can be seen that longer ownership time increases the profitability of recognising charges. When we compare yearly differences, the result is: (1−TR21)×(R−M−F−C)>((1−TR22)×(R−M−C)−F) \matrix{{\left({1 - T{R_{21}}} \right)} \hfill & \times \hfill & {\left({R - M - F - C} \right)} \hfill \cr {} \hfill & > \hfill & {\left({\left({1 - T{R_{22}}} \right) \times \left({R - M - C} \right) - F} \right)} \hfill \cr}

As incomes without taxes are the same, the tax differences are: −TR21×(R−M−C)>−TR22×(R−M−C)→F<TR22TR21×(R−M−C)−(R−M−C) \matrix{{} \hfill & {- T{R_{21}} \times \left({R - M - C} \right) > - T{R_{22}} \times \left({R - M - C} \right)} \hfill \cr \to \hfill & {F < {{T{R_{22}}} \over {T{R_{21}}}} \times \left({R - M - C} \right) - \left({R - M - C} \right)} \hfill \cr}

This one is always true as TR₂₁ > TR₂₂, meaning that the term is less than 1, meaning the right term of the equation is below 0, which is impossible for F as charges cannot be negative.

In this case, it can be seen that recognition is more profitable if higher rental income after taxes during the whole length of ownership makes up the flat’s lower selling price with a lower tax rate. This is more likely to be true if interest (F_I) is low, charges for the financial cost (F) are high, or tax rate differences between rental income scenarios are high. As tax varies between 30% and 34%, the tax difference is not that high, if we take into account that tax differences are likely to be higher when the owner sells the flat, as the tax rate is based on yearly capital income after deductions. It can be concluded that recognising charges becomes more profitable compared with funding if interest rates are low and charges for financial costs are high, practically meaning higher indebtedness. However, in the case of higher indebtedness, the presumed acquisition cost is likely to apply, as was shown above.

To comprehend the tax differences fully, it is possible to compare the first and fourth cases presented in equations 27 and 30 and thereby find out when P₁ > P₄ is true. (35) OT×(FT−FI)−CS−TR11×(0,6×(A+OT×(FT−FI))−CS)+OT×(1−TR21)×(R−M−F−C)>OT×F−CS−TR12×(OT×F−CS)+OT×((1−TR22)×(R−M−C)−F)→OT×(FT−FI)−TR11×(0.6×(A+OT×(FT−FI))−CS)+OT×(1−TR21)×(R−M−F−C)>OT×F−TR12×(OT×F−CS)+OT×((1−TR22)×(R−M−C)−F) \matrix{{{O_T}} \hfill & \times \hfill & {\left({{F_T} - {F_I}} \right) - {C_S} - T{R_{11}}} \hfill \cr {} \hfill & \times \hfill & {\left({0,6 \times \left({A + {O_T} \times \left({{F_T} - {F_I}} \right)} \right) - {C_S}} \right) + {O_T} \times \left({1 - T{R_{21}}} \right)} \hfill \cr {} \hfill & \times \hfill & {\left({R - M - F - C} \right) > {O_T} \times F - {C_S} - T{R_{12}} \times \left({{O_T} \times F - {C_S}} \right)} \hfill \cr {} \hfill & + \hfill & {{O_T} \times \left({\left({1 - T{R_{22}}} \right) \times \left({R - M - C} \right) - F} \right)} \hfill \cr {\to {O_T}} \hfill & \times \hfill & {\left({{F_T} - {F_I}} \right) - T{R_{11}}} \hfill \cr {} \hfill & \times \hfill & {\left({0.6 \times \left({A + {O_T} \times \left({{F_T} - {F_I}} \right)} \right) - {C_S}} \right) + {O_T} \times \left({1 - T{R_{21}}} \right)} \hfill \cr {} \hfill & \times \hfill & {\left({R - M - F - C} \right) > {O_T} \times F - T{R_{12}} \times \left({{O_T} \times F - {C_S}} \right)} \hfill \cr {} \hfill & + \hfill & {{O_T} \times \left({\left({1 - T{R_{22}}} \right) \times \left({R - M - C} \right) - F} \right)} \hfill \cr}

First, the same thing can be seen as in the previous comparison: if charges for financial costs are funded, the sale price of the flat is a bit higher as the larger part of charges has been used to increase the flat’s value: OT×(FT−FI)<OT×F {O_T} \times \left({{F_T} - {F_I}} \right) < {O_T} \times F

The tax differences are a bit trickier to analyse: TR11×(0.6×(A+OT×(FT−FI))−CS)<TR12×(OT×F−CS) \matrix{{T{R_{11}}} \hfill & {\times \left({0.6 \times \left({A + {O_T} \times \left({{F_T} - {F_I}} \right)} \right) - {C_S}} \right)} \hfill \cr {} \hfill & {< T{R_{12}} \times \left({{O_T} \times F - {C_S}} \right)} \hfill \cr}

This equation is more likely to be true if the acquisition cost is lower and interest rates are high. However, it is necessary to remember the precondition for case one: OT×(FT−F1)≥1.5×A {O_T} \times \left({{F_T} - {F_1}} \right) \ge 1.5 \times A

Therefore, although tax treatment becomes more profitable with higher interest rates, it makes this comparison impossible at some point.

Rental income does differ similarly than in the previous comparison: OT×(1−TR21)×(R−M−F−C)> OT×((1−TR22)×(R−M−C)−F) \matrix{{{O_T}} \hfill & {\times \left({1 - T{R_{21}}} \right) \times \left({R - M - F - C} \right)} \hfill \cr {} \hfill & {> \,{O_T} \times \left({\left({1 - T{R_{22}}} \right) \times \left({R - M - C} \right) - F} \right)} \hfill \cr}

This comparison tends to favour presumed acquisition cost and recognising charges in cases where ownership time, and yearly charges for financial costs are higher, and interest rates are low. Therefore, it can be stated that when interest rates are low, the more the investor pays LLHC charges for financial costs, the more likely it is to be more profitable to use presumed acquisition costs and recognised charges than actual acquisition cost and funded charges. As the equation tends to be true if the acquisition cost is lower, in the investor’s perspective, it is better to have an LLCH with a higher debt ratio as it lowers the acquisition cost and therefore increases total profits. It can also be seen that if the flat price has increased so that there are even more considerable differences between I_s and A, the more profitable recognised charges are for investors as presumed acquisition costs cut the price increase from an increase in market value and paying off LLHC debt.

In the analysis of case comparisons from cases one, two, and four, it is possible to see that the following factors can make a high LLHC debt rate profitable for the investor:

– Low interest rates