How to depreciate when renting real estate in the Czech Republic

5.2. 2021

As a rule, the depreciation item will bring us the largest reduction of income taxes when renting real estate. Depreciation is, in other words, the wear and tear of real estate. Every year the property wears out and we can reduce taxes by the amount of wear and tear. E.g. with real estate for approximately 3 million CZK we can reduce taxes by approximately 450,000 CZK – and, therefore, I think it’s worth understanding the topic. We´ll now explain when we can depreciate and how to determine depreciation. Let’s go.

What real estate can be depreciated

I’ll start with what properties can’t be depreciated.

  • cooperative appartments: here we aren´t the owners of the flat, we are only members of the cooperative with the right to use the flat and this can´t be depreciated
  • land: land can´t wear out and therefore can´t be depreciated
  • real estate donated without financial consideration: it is excluded from depreciation by provisions of the law

We can therefore depreciate the following properties:

  • residential and non-residential units
  • houses
  • apartment buildings
  • recreational buildings
  • commercial real estate

Establishing the purchase price

In order to know how much can be depreciated, we must establish the purchase price and then we´ll calculate the depreciation. First we must verify how much time has elapsed between the acquisition of the property and the beginning of rental. There are two possibilities:

  • The period exceeds 5 years. In this case, we must have an expert opinion elaborated regarding the value of the property as of the date of starting the rental. I add that we´ll only value the structure, because only the structure can be depreciated, not the related land. Thus, for example, in the case of a housing unit, only the apartment will be valued, not the share in the land under the apartment building or the share in the related courtyard or garden.
  • The period is shorter than 5 years. There may be several options here, depending on how we acquired the property:
  1. If we inherited the property, we must have a valuation of the property elaborated as of the date of acquisition. I´d like to add that we´ll only appreciate the structure, as I explain in more detail above.
  2. When we bought the property, we´ll depreciate the purchase price of the property including all relevant costs such as acquisition tax, transfer costs, etc. Again, however, I add that we mustn´t depreciate the part of the purchase price that covers the land. In most purchase contracts, the price for the land and the price for the construction aren´t broken down separately, so we need an expert opinion of the price of the land or we can use a price map of building plots. Land prices in Prague can be found here, other municipalities have price maps too and their list can be found here. We´ll then deduct the determined price of the land from the total purchase price.
  3. A special attention needs to be paid to an apartment in personal ownership which was transferred from cooperative ownership. This is usually done for a minimum fee which is stated in the purchase contract with the cooperative, and therefore the purchase price of the apartment is in the amount of this minimum fee and we don´t get the real value of the apartment into taxes. Therefore, it pays off to wait 5 years with the rental of such an apartment and then have it valued by a sworn expert as of the date of commencement of the rental.

How to determine the amount of depreciation

We have two depreciation options

  1. straight-line depreciation where we always apply the same amount of depreciation in the individual years, with the exception of the first year when depreciation is lower,
  2. accelerated depreciation when the amount of depreciation is high at the beginning and depreciation gradually decreases in the following years

For the sake of simplicity, we´ll only deal with straight-line depreciation which is also the most commonly used. In total, 30 years are depreciated, in the first year 1.4 percent of the purchase price is depreciated and in the following years 3.4 percent.

Example of depreciation calculation

Mr. Novák bought an apartment in Prague in 2019 for 4 million CZK and in the same year he started to rent it. In addition to the purchase price, he paid acquisition tax in the amount of 160,000 CZK and fees to his lawyer who arranged the transfer in the amount of 20,000 CZK.

Mr. Novák first had to determine the total purchase price. It is 4,000,000 CZK + 160,000 CZK + 20,000 CZK, that is a total of 4,180,000 CZK. However, this amount also includes the value of the share in the land under the apartment building. Using the price map of land in Prague, he found out that the price of the share in the land is 280,000 CZK. He can therefore depreciate 3,900,000 CZK.

The first year of the rental, depreciation is 1.4 percent, i.e. 54,600 CZK.

The second and subsequent years, depreciation is 3.4 percent, i.e. 132,600 CZK

In addition to depreciation, you can also use a number of other costs and you will find out how to tax income from real estate rental in this article.

In conclusion, I´d like to direct you to other materials that will help you with the rental of the property.