On March 11 2026, a new administration took office in Chile. Among its first economic measures, it announced a proposal to temporarily suspend VAT on the sale of residential properties, in response to the prolonged crisis affecting the housing sector over recent years.
Drivers of the residential real estate crisis
Chile’s residential real estate market has remained structurally depressed, reflecting a combination of tax, financial, and supply‑side constraints. A key factor was the introduction of VAT on the first sale of residential properties under the 2014 tax reform, which became effective in 2016.
In addition, legislation enacted in 2022 – fully effective from January 2025 – significantly reduced the special VAT credit previously available to construction companies. This credit operated as a subsidy for housing development, and its gradual elimination materially increased effective housing prices and adversely affected project feasibility.
These tax changes were compounded by persistent land scarcity in urban areas and tighter mortgage lending standards imposed by banks, including higher income requirements and larger down‑payment thresholds, which further constrained demand. Environmental regulations and community‑driven restrictions on land use have also limited the availability of developable land, exacerbating supply shortages.
The bill announcement
Against this backdrop, the government announced a bill aimed at temporarily suspending VAT on the sale of residential properties for a one‑year period. According to industry estimates, this measure could translate into an effective reduction in final housing prices of between 3% and 8%. However, as the incentive is directed at the supply side rather than consumers, the degree of price pass‑through remains uncertain and will depend on market competition, inventory levels, and developers’ balance sheet considerations.
Tax effects and market impact
Importantly, VAT‑exempt sales do not allow for the recovery of input VAT. As a result, VAT incurred on construction costs would become non‑creditable and should be capitalised as part of the property’s cost base, partially offsetting the gross tax relief generated by the exemption.
In the short term, the real estate sector has indicated that the announcement itself has produced an adverse timing effect. Residential sales have slowed further as potential buyers postpone purchase decisions in anticipation of lower prices once the exemption is enacted. This intertemporal substitution effect underscores the importance of swift legislative approval to avoid prolonging market stagnation.
Outlook
The policy objective is to enable developers to liquidate accumulated housing stock at lower effective prices, thereby restoring transaction volumes and reactivating construction activity. Whether the measure proves successful will depend on congressional approval, the speed of implementation, the degree of price pass‑through, and its interaction with prevailing credit conditions.
Ultimately, its effectiveness will be assessed by its ability to stimulate demand without introducing new market distortions.
