This is a frequent question asked by clients, who plan to buy an investment property, whether it includes investment apartments, an apartment building, land or commercial real estate. The answer is very simple: if you plan to own a property in a longer time horizon, in the vast majority of cases it is much preferable to buy a property in your name, mainly due to income tax savings in the potential future sale of the property. Let’s have a look at a simple case, which is also a very common one.
In 1992, two different entrepreneurs got an idea to buy an apartment building in Prague in Vinohrady. At that time, such buildings were sold for approximately one million CZK. Seen from today’s point of view, this is a ridiculous amount, because the value of such a building is currently about 100 million CZK, but at that time purchasing real estate was not so common, rents were regulated, buildings were in a very poor state, etc. The first entrepreneur decided to buy the building as company acquisition, establishing the company only for the purpose of owning this property, and the other entrepreneur purchased the building in his name.
It’s 2020, both entrepreneurs are 28 years older and they are tired of worrying about the building. Therefore they decided to sell the property and both found a buyer offering 100 million CZK. During the ownership of the property, both entrepreneurs invested in the building a total of 5 million CZK and they applied depreciation amounting to 3 million CZK against the rental income.
Let’s now calculate how much each entrepreneur pays in taxes:
Sales price 100,000,000 CZK
Tax value of the building in accounting 3,000,000 CZK (acquisition price plus appreciation minus depreciation)
For taxation 97,000,000 CZK
Company income tax (19%) 18,430,000 CZK
After paying the tax there is 81,570,000 CZK left on the company’s accounts. The owner wants to use this money for his own purposes, such as donating part of it to his children and paying for the reconstruction of his house, he wants to travel etc. and so that he could use this money from the company for his personal purposes, i.e. to transfer it to his account and dispose of it freely, he must tax this amount with further 15%.
Personal income tax (15%) 12,235,500 CZK
The entrepreneur will receive 69,334,500 CZK on his personal account
In total, he will pay 30,665,500 CZK in taxes
Sales price 100,000,000 CZK
Physical entities are exempt from income tax on the sale of any property if they own it for more than 5 years (property purchased before the end of 2020) or 10 years (property purchased in 2021 and later), therefore the tax value of the building in accounting is not important for the calculation.
The entrepreneur will receive 100,000,000 CZK on his personal account
He will pay a total of 0 CZK in taxes
The decision of the first entrepreneur made in 1992 to purchase property as company acquisition was a mistake costing him 30 million CZK.
Of course, it must be added that the entrepreneur who purchased the building as company acquisition could sell the company and did not have to sell the property, the income from the sale of the company is also exempted from tax after a certain time and the matter would be settled. That is true, but only partially. He wouldn´t have got 100 million CZK for the sale of the company as when selling the property, but significantly less in all probability. The buyer of such a company can easily calculate that, in contrast to future rental income, he can only claim depreciation of the tax value of the building in the accounting, which in this case is 3,000,000 CZK. While if he bought the property (and not the company), he could claim almost the entire purchase price of the house, i.e. 100,000,000 CZK. In the future, he will pay unnecessarily approximately 18,430,000 CZK more in taxes on rent than if he purchased the property and will request an adequate discount because of this future tax burden. The tax value of real estate in companies is significantly lower in the vast majority of cases than the current market value of real estate, mainly due to depreciation and rising real estate prices
To confirm the main point of this article that when owning a property for a long time, it pays off to buy it in your name, we can have a look at how real estate magnate Václav Skala bought the Tančící dům – Dancing House (and many other premium properties). Of course he did so in his name for the amount of 360,000,000 CZK. Once Mr. Skala sells this building, for example, for 600,000,000, CZK he won´t have to pay a single Czech crown of income tax on his profit of 240,000,000 CZK.