We´ll use the most common case to explain how to properly deal with taxation when renting out an apartment. This article expands on texts and videos we´ve recently published. They are the following texts:
In February 2020, Mr. Novák bought an apartment from his own resources in Vackova Street in Prague-Stodůlky for 3,590,000 CZK. The purchase of the apartment included a co-ownership share in the building and plot of land amounting to 441/62647. Mr. Novák completely reconstructed the apartment for 350,000 CZK which included a new brick sanitary unit, that is a newly constructed bathroom and toilet, new wiring, new floors, new plaster, ceilings, new windows, new fitted kitchen, built-in wardrobes and security door. He also bought electrical appliances for a total of 23,000 CZK – a washing machine, refrigerator, fume hood and stove. Mr. Novák rented out the apartment from July 2020 for 13,500 CZK + advance payment for utilities. The total monthly fees in the apartment are 3,250 CZK, that is advance payment for utilities paid by Owners’ Association + 500 CZK for electricity, of which Mr. Novák charged the tenant with only 2,250 CZK (+500 CZK for electricity) as advance payment because being a landlord he can´t charge the repairs fund, remuneration of the Owners’ Association committee, administration fee and insurance of the building. These fees amount in total to 1,000 CZK per month.
First, we determine Mr. Novák’s annual income. Here we calculate it for 6 months from July to December 2020, the rent is 13,500 CZK. The income is therefore a total of 81,000 CZK.
Here we have a number of items that we must determine and by which we can reduce the resulting amount for taxation. Now let’s go through them one by one.
Determination of the price for depreciation
We know that Mr. Novák bought the apartment for 3,590,000 CZK. This will be our initial value.
However, the purchase price includes the plot of land under the building which is related to the apartment. The land can´t be depreciated so we must deduct the value of the plot of land from this purchase price. In Prague, there is a price map of building plots which is sufficient for this purpose. According to this map, the price of the land is 3,000 CZK per m2, the total land has an area of 1,088 m2, the total price of the land is 3,264,000 CZK and therefore the share of 441/62647 corresponds to the amount of 22,977 CZK by which we reduce the purchase price.
Furthermore, Mr. Novák carried out a complete reconstruction of the apartment for 350,000 CZK which is in such an extent that it can be considered a technical appreciation. The cost exceeds 80,000 CZK and at the same time the quality of the apartment fundamentally changed. Therefore, the cost of this reconstruction must also be depreciated.
The price for depreciation is thus calculated as follows: purchase price 3,590,000 CZK – land price 22,977 CZK + reconstruction 350,000 CZK and that equals 3,917,023 CZK.
Determination of the amount of depreciation
Mr. Novák decided to use straight-line depreciation. He expects to own the apartment in the long term. The first year, he will therefore depreciate 1.4% of the price for depreciation and subsequent years 3.4% which are the following amounts:
1st year (1.4%) = 54,838 CZK
2nd to 30th year (3.4%) = 133,179 CZK
The fact that Mr. Novák owns and rents out the apartment only for a part of the year doesn´t affect the possibility to apply the entire depreciation in the given year.
Determination of the amount of other expenses
Mr. Novák had other expenses related to the rental and is entitled to claim expenses incurred with his car:
In our case, these expenses are 84,000 CZK in total.
There are other possible expenses which Mr. Novák was able to include in the rental expenses and which aren´t considered in this example:
From the total income of 81,000 CZK we deduct depreciation of 54,838 CZK and other expenses of 84,000 CZK and we incur a loss amounting to 57,838 CZK, which is a very common case in the first year of renting out. The rental income tax will therefore be zero. If Mr. Novák has other income from business, his taxable income will be reduced by this amount of loss (however, it doesn´t apply to social and health insurance contributions). It is necessary to consider whether to apply depreciation this year, you can also apply it in the years to come and thus „save“ it. In such a case, the loss would be only 3,000 CZK.
In conclusion, I´d like to direct you to some other materials that will help you with the rental of the property: