In today´s post, I´ve prepared a manual for you on how to tax real estate rental income correctly and in your favour. Let´s go. In the Act on Income Tax, the real estate rental has its own taxation regime pursuant to Section 9, and an annex to the tax return is filled in for this purpose pursuant to Section 9.
Pursuant to the law, there are two ways to calculate the rental income tax base:
Actual expenses are those which the taxpayer proves, which they have really incurred and which are related to the taxable income achieved. In any case, by choosing the actual expenses, the landlord also chooses a more labour intensive method of calculating the tax as they must always be able to prove actual expenses to the tax office, that is to prove what the money was spent on, that it was really paid and that the expenditure was related to rental income.
Flat-rate expenses are determined as a percentage of the income – in the case of renting it is thirty percent – and are taken to cover all the taxpayer’s real expenses. The Act on Income Tax establishes the maximum value of flat-rate expenses at 600 000 CZK, which corresponds to income of two million. The lessor can´t claim more against the income and every crown earned above this limit is taxed in full. This method of determining the tax base is simpler, you only need to record your income and not your expenses.
When applying actual expenses, in the vast majority of cases we pay a lower tax than when using the so-called flat-rate expenses which have the only advantage of being less labour intensive.
When the lessor goes for the flat-rate expenses it pays off only if the depreciation of the real estate can´t be applied in the expenses, or when these depreciations are very low. This is the case of renting a cooperative flat for which tax depreciations can´t be applied, or other real estate excluded from depreciation (for example, obtained by a gift that was tax-exempt).
First we need to do some basic calculation
The rental income to be taxed will include only net rent without related utilities, these are mainly advance payments for utilities (for heating, for hot water supply, cleaning of common areas in the building, use of elevator, water supply, sewage disposal , lighting of common areas in the building, inspection and cleaning of chimneys, waste disposal…). Likewise, we don´t include advance payments and deposits from tenants in the income.
Against the rental income, we can claim the following expenses
The Act on Income Tax gives a choice between two methods of depreciation – accelerated and straight-line. Whatever method you choose, you depreciate for the same amount of time but when you choose the accelerated form, the acquisition price is depreciated faster in the first years. Straight-line depreciation remains the same except for the first year of depreciation.
For the sake of simplicity, we only consider straight-line depreciation in the instructions.
|Depreciation group||In first year of depreciation||In following years of depreciation||For increased entry price|
|3 – buildings and flats in buildings from timber and plastic||5,5||10,5||10|
|4 – hotels and historic or listed buildings||2,15||5,15||5,0|
|5 – Other flats and apartment buildings||1,4||3,4||3,4|
Most real estate is in depreciation group no. 5, which means that for the first year of depreciation you can apply 1.4% of the purchase price of the real estate and in the following years 3.4%.
Depreciation can´t be applied to sublease of cooperative real estate or similar forms of ownership (share in a limited company, condominium, etc.).
I write more about depreciation in this article.
In the case of purchased real estate, it will be the purchase price plus ancillary acquisition costs (for example, real estate acquisition tax, commissions to real estate brokers, expenses for lawyers, more extensive building modifications whose value exceed 40,000 CZK, built-in furniture, furniture whose value exceeds 40,000 CZK).
For an inherited property or property that was acquired more than five years before the lease starts, this will be the so-called replacement cost, or the price at which the property would be acquired at the time the rental begins. We´ll have an expert opinion prepared for this price.
When acquiring real estate through a tax-exempt gift, depreciation is not possible.
Lessors claiming actual expenses against income keep their records. This means that they must record expenses (when, for what and in what amount they were incurred), they must keep all documents and also documents proving their payment. Additionally, they must also keep records of depreciated assets (that is keep depreciation cards and documents for the entry price), records of the creation and use of a provision for repairs (if any) and records of receivables and debts.
Practically, it is sufficient to keep records, for example, in an Excel spreadsheet; it is good to convert all documents into electronic form so that there is no risk of their loss or impairment (for example, some receipts will fade over time and will be no more legible).
Tip: When a loss is incurred, the period when the tax office can perform inspection is extended up to 8 years back, so if we incur a loss when applying all expenditure items, it is preferable not to include some expenses (e.g. postpone depreciation by one year). The time limit for inspection is then only 3 years back.
There is no need for records, depreciation, acquisition price, etc. All we need is to add up the rent in the given year.
Do you want to know more about how to buy and rent apartments? Visit the website of the online course Million Dollars Real Estate.