Sale of real estate in Russia

Sale of real estate in Russia: characteristics and risks

Russian law classifies land and everything that is firmly connected with it, including buildings, structures, premises, as real estate. Information about all immovable objects on the territory of the Russian Federation is entered into the state register of immovable property. As a rule, the owner of real estate can dispose of it in any way, including the sale at any time to another person. However, the sale of real estate has its own nuances that need to be taken into account by a potential seller if he or she does not want to carry unjustified costs or lose his or her property (hereinafter - the real property/real estate) and money. The most significant characteristics of sale will be outlined below.

Property

It is important to note that land plots are registered separately from buildings, and parts of buildings (residential apartments, non-residential premises, parking spaces) may be registered separately from the buildings themselves. Thus, the land and buildings on it can have different owners. At the same time, situations are possible when the sale and purchase of such real estate objects also occurs separately. For example, if the owner of a dwelling house does not own the land under it, he or she can sell the house separately from the land. However, if the owner of both the land and the house is the same person, such a sale is no longer possible - both the land plot and the house shall be sold as a single object[1].

Also, the owner may own the immovable object not as a whole object, but as a part of it: have a share in the ownership of the property (usually as a result of privatization or inheritance) or have the property in joint ownership (usually when it is acquired in marriage). The sale of such real estate or a share in ownership has its own characteristics (see below).

The procedure of transaction

For the sale of real estate, the parties shall draw up a written contract. It shall indicate what property is being transferred, as well as the procedure and amount of payment under the contract. It is recommended to describe the property as precisely as possible. The contract should indicate the deficiencies of the property, which may lead to claims (including lawsuits) of the buyer in the future. 

The parties can conclude a transaction in person or through representatives acting under a notarized power of attorney[2]. However, it is highly desirable to discuss the main terms of the transaction directly between the parties. In order to minimize risks, powers of attorney should provide the representatives only with limited powers (for example, to sell property at a certain price or to submit documents already signed by the seller for registration). In some cases, the law establishes the obligation of notarization of the contract (for example, when selling a share in real estate[3], selling property of minors or incapacitated persons[4]). The parties can also notarize the contract on their own initiative and entrust the notary with the subsequent submission of documents for registration of ownership.

Then, both parties to the contract (or their representatives or a notary) submit to the body that registers rights to real estate (Rosreestr) an application for registering the ownership of the new owner[5], attaching the contract, confirmation of payment of the state duty and, if necessary, other documents. Within 7 - 9 working days, Rosreestr registers the transfer of ownership to the buyer[6].

For the direct transfer of real estate (under the concluded contract), the parties, as a rule, conclude an act of acceptance and transfer, in which they describe the condition of the real estate at the time of transfer, the moment of transfer of the property to the new owner, from which the obligation to maintain the property and the risk of its loss or damage will pass to him or her. In this case, the transfer can occur both before and after the registration of the transfer of ownership.

The sale of shared and joint property

For the sale of a share in ownership of real estate, the owner shall send a written offer to other owners of shares in the same property (indicating the price of sale). The owner is entitled to sell it to third party only if the co-owners waive their right to buy out this share or do not give an answer within 1 month. Confirmation of the notification of the co-owners and/or their refusal to buy the share shall be submitted to Rosreestr by the seller when registering the transfer of rights[7]. Although a violation of this provision does not make the transaction void (a co-owner can only buy back the share within 3 months[8]), Rosreestr shall not register the transfer of ownership without these documents.

In the absence of a marriage contract between the spouses, the joint property of spouses in Russia is property acquired during the marriage for value (i.e. purchased or exchanged)[9]. During the sale of Russian real estate acquired in international marriage, the provisions of applicable treaties must also be considered. As a rule, the law of the country of joint residence or common citizenship of the spouses applies to international marriages. Also, some treaties directly prescribe to apply the law of the country where real estate is located.

In any case, the sale of joint real property located in Russia requires the notarized consent of another spouse (including the former one, if the property was not divided after the divorce). Its submission to Rosreestr is not mandatory. Therefore, the transfer of property rights can be registered without it. However, it should be noted that a spouse who had the right to joint property and did not give a consent to the sale, may challenge the transaction within 1 year from the moment when he or she learned or should have learned about its completion[10].

The sale of real estate owned by children under the age of 18

There are certain restrictions on the sale of property owned by children under the age of 18. The parent or other legal guardian of the child shall obtain the prior consent the custody service for such a sale[11]. The condition for provision of such a consent is usually the non-reduction of the property of the minor. Generally, it means that the legal guardians are obliged to give him or her an equivalent (in value) property or to deposit money into the child's account. The lack of consent of the custody service will result in the refusal to register the transfer of property by Rosreestr, and the violation of obligations given as a condition of such consent may result in challenging transaction.

Payment

The price of the property to sale and the payments procedures under the transaction should be fixed in the purchase and sale contract. The following methods can be used:

- payment in cash when the parties directly hand over the money to each other,

- payment via a safety deposit box,

- payment via a notarial deposit,

- transfer of the money to a bank account,

- payment by a letter of credit.

When paying in cash, it may be required from the seller to provide a receipt confirming that he or she has received money from the buyer. The seller should give such a receipt to the buyer only after receiving the whole amount as a payment. This method also involves the greatest risk of fraud by the buyer (for example, paying with counterfeit money) or robbery.

When making payments via a safety deposit box, the money in payment for the transaction are laid in a specialized bank safe in the presence of the buyer and the seller. Having registered the transfer of rights within the period specified by the agreement with the bank, the seller submits a confirmation document to the bank and takes the money from the safe. The main danger involved is that the bank is not liable for the box content. Therefore, in the event of theft, it is extremely difficult to prove the existence of the respective amount. In addition, if the seller misses the deadline, the buyer gets access to the box (as if the transaction did not take place).

The payment via a notarial deposit is a relatively safe way, however, it results in additional costs for the notarial fee.

Money transfers to a bank account are more convenient for parties located in different cities or countries. However, transfers of significant amounts may raise suspicion among the security services of banks involved in combating money laundering. In addition, international transfers from Russia to other countries can be difficult due to restrictions for foreign currency transactions. There is also no guarantee of payment by the buyer after the completion of the transaction.

Payment by a letter of credit involves the opening of a special account from which the seller can receive money against presentation of documents confirming the transaction. This method may be limited by the capabilities of banks at the place of the transaction, as well as the cost of banking services.

In order to minimize the risks of loss of real estate in case of non-payment under the transaction, it is also possible to register the seller's right of pledge to the real estate until the full payment. It can be registered when submitting documents for registration of the transfer of rights to Rosreestr.

Taxation

Russian tax law provides that when real estate is sold by an individual, its owner shall pay personal income tax if he or she owns it for no more than 5 years (no more than 3 years - if the property is inherited, privatized or received as a gift from close relatives, as well as if the property for sale is the only dwelling property in the seller’s ownership). The rate of personal income tax is 13% for tax residents of the Russian Federation or 30% for non-residents (tax resident of the Russian Federation is a person who resides in the Russian Federation for at least 183 days within 12 consecutive calendar months[12]). Tax residents have the right to reduce the amount of taxable income by 1,000,000 RUB (for residential real estate and land plots) or 250,000 RUB (for other real estate), or for the cost of its acquisition[13]. Also, the income from the sale, from which the personal income tax is paid (excluding deductions), cannot be less than 70% of the cadastral value of the real estate[14].

Conclusions and recommendations

In order to reduce the risk of losses when concluding real estate transactions, it is recommended for the seller to do the following:

- to hire experienced specialists who are personally disinterested, for the assistance in the transaction and for the search of a buyer;

- to meet or communicate with the buyer personally for the assessment of his or her ability to pay for the transaction and willingness to act in good faith;

- to receive and present to the buyer before registration of the transaction all documents related to it (in particular, the consent of the spouses, notification and/or waiver of the prior purchase right by shared co-owners, etc.);

- not to give the originals of the documents to the buyer or his or her representative before the completion of the transaction;

- to choose the safest payment method that guarantees the execution of the transaction by the buyer;

- to take into account the potential tax burden.

When exercising each of the above actions, it is necessary to take into account a lot of factors and make sure  of relevant facts. This requires a high-quality case study with the involvement of qualified lawyers.

How we can help

Lawyers of Avakov Tarasov & Partners provide legal aid in real estate sale cases, including legal advice, analysis of the tax consequences of a transaction, preparation of transaction documents, due diligence of counterparties, and interaction with Russian authorities.

[1] Art. 35 of the Russian Land Code.

[2] Art. 185 of the Russian Civil Code.

[3] Art. 42 of the Federal Law "On State Registration of Real Estate" of 13/07/2015 No. 218-FZ.

[4] Art. 54 of the Federal Law "On State Registration of Real Estate" of 13/07/2015 No. 218-FZ.

[5] Art. 15 of the Federal Law "On State Registration of Real Estate" of 13/07/2015 No. 218-FZ.

[6] Art. 16 of the Federal Law "On State Registration of Real Estate" of 13/07/2015 No. 218-FZ.

[7] Art. 42 of the Federal Law "On State Registration of Real Estate" of 13/07/2015 No. 218-FZ.

[8] Art. 250 of the Russian Civil Code

[9] Art. 256 of the Russian Civil Code, art. 34 of the Russian Family Code.

[10] Art. 35 of the Russian Family Code.

[11] Art. 37 of the Russian Family Code.

[12] Art. 207 of the Russian Tax Code.

[13] Art. 220 of the Russian Tax Code.

[14] Art. 214.9 of the Russian Tax Code.