Before we decide to sell real estate, we should definitely think about whether the time is right for the sale regarding taxes as we can save some money by the right timing of the sale. This text will guide you through the taxes that we must take into consideration when selling and which affect the amount that we´ll have left after the sale.
The proceeds from the sale of real estate are subject to income tax, however, there are a few exceptions for physical entities where the profit is exempt from tax. The first exception concerns the sale of a house or unit that doesn´t include non-residential space. In this case, the proceeds on sale may be exempt if
This exemption can´t be used if the seller included the real estate in the commercial property or removed it from it in a period shorter than two years before its sale. I would add here that the exemption can only be used for real estate that is fit for permanent housing, meaning it is really only apartments and houses, not recreational facilities, studios, non-residential units, land, etc.
If we don´t fit into the above stated exception for exemption, let´s not despair, there is one more which applies to all types of real estate (including non-residential premises), which hadn´t been included in commercial property for at least 10 years before the sale and where more than 10 years elapsed since their acquisition.
In all other cases, income tax is payable. For physical entities it is necessary to determine whether the sale of real estate is income from business, then in addition to income tax also social and health insurance must be paid from the profit, or whether it is other income, where you must pay „only“ income tax. The decisive criterion is whether the real estate was included in commercial property. If so, the profit from sales is taxed as business income. If not, the profit will be taxed like other income.
Contrary to the income from the sale of real estate, we can then claim the costs associated with the sale, these are most often
We then tax the resulting profit. If the property is sold by a legal entity, the tax rate is 19%, for physical entities the tax rate is 15%, in the case of classification as income from business we must also take into account the payment of social and health insurance, or, possibly, a solidarity tax increase. If it isn´t income from business and we incur a loss, this loss can be claimed against income from the sale of other real estate in the given year. If the sale is taxed as included in the business, the resulting loss may, for tax purposes, reduce profits from other activities in the given year, or in any year for the following five years.
Finally, we should mention the case of the sale of membership rights in a cooperative, where the seller (transferor) is exempt from income tax after 10 years elapse from the acquisition of membership rights. Thus, for the so-called cooperative flats, there is no exemption period of 2 years for living in the property.
This type of tax is not paid yet in substantial amount for ordinary real estate, so managing sales with regards to this tax would not make sense. The tax is always paid one year in advance, and if we sell, for example, in the middle of the year, the state will not refund the tax for the second half of the year. It is possible to agree with the buyer on the payment of a proportional part of the tax for the part of the year when the buyer is already the owner, but in practice this isn´t usually done.
This tax is very complicated in real estate, so in this text I´ll devote myself only to the most common case where the property is sold by a payer who doesn´t act from the position of „developer„. In this case, we don´t have to deal with value added tax at all, as the sale is not subject to it. Typically, this is a sale of real estate owned by a physical entity that didn´t intend to include the sale in business activity for the purpose of making a profit and therefore didn´t make any significant changes in the nature of the real estate that would increase its value.
The situation may be different for the seller who basically behaves similarly to a developer and who, for example, split up the land and set up gas, electricity and water distribution systems in the plot of land or carried out building modifications to the building which resulted in the creation of new units. In that case, there is a real risk of value added tax. Due to the complexity of the tax, I recommend that you take a tax advisor who specializes in real estate to help you.
If you are interested in more information about real estate taxes, you can contact our cooperating tax advisor Ing. Ondřej Antoš LL.M.