Updated on 15. 1. 2021: Sale of lands acquired before 2021 and income tax exemption
In the last years, we have been observing an increasing interest of our clients in investments of their free financial resources. Conservative or beginning investors choose often real estate. In this context, questions concerning the tax burden of such investment arise. Therefore, Mgr. Hana Erbsová, specialist in the field of tax law, summarizes briefly at least the tax minimum.
Real estate acquisition tax
On 26 September 2020, the Act No. 386/2020 Coll. repealed the real estate acquisition tax which affects retroactively all the transfers of ownership for which the title was registered as of 1 December 2019 or later on, and transfers made on 1 December 2019 or later on in case of real estate not registered in the Land Register.
However, the real estate acquisition tax continues to apply to the transfers of real estate ownership realized before that date.
We should remind of the fact that since 1 December 2019 the real estate acquisition tax has been changed whereas the change was a reaction to the even more frequent specification of individual apartments in family houses as separate real estate (units).
Until the amendment, only the (dwelling) units in multiple dwelling houses, which means in houses that were not determined only for family living, were expressly exempted by law.
However, in 2020 the Supreme Administrative Court rendered a long-awaited decision which pleases, for sure, everybody who bought a dwelling unit in a family house before 1 November 2019. The Financial Administration refused obstinately to admit the real estate acquisition tax exemption for transfers of such units - with a reference to the exact wording of the Act. The decision of the Supreme Administrative Court, reference No. 4 Afs 89/2020–44 of 24.6.2020, and a following decision put an end to this practice.
As the Supreme Administrative Court came to the conclusion the right to real estate tax exemption applies not only to the units in multiple dwelling houses but also to the units in family houses, some of the tax payers who paid this tax in the past can now file an additional tax return and claim its return.
Generally, the additional tax return can be filed within 3 years after expiry of a period for filing of a proper tax return (i.e. till the end of the 3rd calendar month following a month when a title is registered in the Land Register or when ownership to real estate not being registered in the Land Register is acquired). However, there could have been circumstances in case of some tax payers, which have extended the period.
The tax exemption applied only to the first sale of a unit in a family house and it must have been sold within 5 years after completion or creation by construction works or after usage commencement. The period was calculated from a day which occurred first. Thus, it is not essential when the unit was registered in the Land Register as someone´s ownership.
It was not possible to use the tax exemption for purchase of older units in family houses which existed or were used more than 5 years in spite of the fact they were registered in the Land Register less than 5 years ago.
For completeness´ sake, we should state that the tax exemption applied also to the first purchase of a land, or right to build, which included the completed or used construction of a family house, and to purchase of such family house within 5 years after its completion or usage commencement.
In the field of VAT, the tax exemption mode in case of real estate supply is opposite. Supply of real estate (or its significant modification) by a tax payer, made firstly after expiry of a 5-year period after its final approval or after usage commencement without any final approval to be necessary, is exempted from VAT. However, a tax payer can claim the related input VAT deduction (or can claim only its part if the real estate had been used for his/her economic activity already before the sale).
Such tax exemption applies to a unit (dwelling or non-dwelling), construction and land or right to build which includes a construction, underground construction with a separate purpose, and to utilities.
The Court of Justice of the European Union assessed a transaction, whose subject matter was supply of a construction (functional but determined for demolition) and for which the contracting parties expressed their intention that a buyer will demolish the construction and will use the land for new construction, as exempted supply of land with a construction as well.
Supply of a land which does not form a functional unit with a construction and which is not a building land is always exempted from VAT, i.e. without any time limit.
A decreased VAT rate of 15 % is applied to supply of the most common real estate for living, made before expiry of an exemption period.
For purpose of VAT, the real estate handover to its acquirer for usage or delivery of a notification containing the date when a change of title was registered is considered as real estate supply. A day occurring first is decisive.
A payer can also decide that the real estate which could be exempted from tax will be supplied including VAT. If a recipient of supply is a VAT payer, he/she must agree with such a procedure. In such case the obligation of a tax return, eventually of VAT payment from such supply, passes just to the recipient. A consent of a non-payer is not required whereas a non-payer pays to a supplier the price for supply increased by the output VAT.
We would like to remind you of the changes concerning VAT in case of real estate lease between VAT payers, as applicable since 1 January 2021 (https://www.arws.cz/novinky-v-arrows/investice-platcu-dph-do-najemni-nemovitosti).
Natural person income tax
Starting from 1 January 2021, two modes will be applied in case of the tax exemption of the natural person´s income from real estate sale, depending on the fact when a seller acquired such real estate into his/her ownership.
In case of sale of real estate acquired into ownership before 1 January 2021, the natural person´s income from real estate sale will be exempted from tax if the sale is realized after expiry of a 5-year period after ownership acquisition. In case of sale of real estate acquired into ownership after 1 January 2021, the natural person´s income from real estate sale will be exempted from tax if the sale is realized after expiry of a 10-year period after ownership acquisition. The period includes also duration of ownership by a direct ancestor or spouse from whom a seller inherited the real estate.
If a natural person sells real estate before expiry of a 10-year period after its acquisition, the income from such sale will be exempted from tax in case the affected person uses the income to ensure his/her own housing needs. “Housing needs” are exactly defined by the Act on Income Taxes. A payer must notify the relevant Tax Office of acquiring such income till the end of a period for tax return filing for a taxation period when the income was acquired.
The income to ensure own housing needs must be expended latest within a following year (taxation period) after a year when the income was acquired. However, this condition is met by a payer even in case the housing needs had been ensured (from other resources) before the income from real estate sale was acquired. Nevertheless, the housing needs must not have been ensured earlier than during a prior calendar year. If a payer expended a lower amount to ensure his/her housing needs, only the corresponding part of income from real estate sale will be exempted from tax. A claim on tax exemption terminates by non-meeting of this condition.
However, the land owners who acquired the lands into ownership before 1 January 2021 must still wait with their sale at least for 5 years. Otherwise, their income from sale will not be exempted from tax even if the income is used to ensure housing needs. On the other hand, a person acquiring the land after 1 January 2021 can sell it with tax exemption basically immediately if the above-mentioned conditions are met.
A more favourable tax treatment applies to family houses and (dwelling) units where the seller´s residence (real, not only announced) is located. Such real estate can be sold by its owner (natural person) with tax exemption already 2 years after a day when his/her residence was established there (however, a title to such real estate must last at least for the same period). If an owner uses the income from sale to purchase another real estate for his/her housing needs, he/she does not even have to wait for expiry of that period.
The condition stating that a seller mustn´t receive the income before expiry of a “waiting period” (even though the sale is factually realized after expiry of that period) applies to tax exemption as well. If real estate was used for a business activity, the “waiting period” starts on a day when the real estate is excluded from business property. “Waiting period” for tax exemption is suspended (eventually starts again) if the transfer of a title to real estate as security of obligation is applied (for instance, to secure a debt of its owner).
Sale of real estate (its part or unit established in real estate) acquired by a seller in restitution is also exempted from tax (without a “waiting period”). If real estate was used for a business activity, the “waiting period” of 5 (10) years starts on a day when the real estate is excluded from business property.
The above-mentioned amendment to the Act caused also a change in the form of decrease of the maximum amount of mortgage interests or building savings loan interests used to ensure housing needs, which a natural person can deduct from the tax base. A day when the housing needs have been “ensured” is decisive again (see Section 4b of the Act on Income Taxes, as mended on 1.1.2021, which can form a basis for the conception that the moment of “ensuring” can vary depending on a type of specific housing needs).
In simple terms, if the housing needs were ensured before 1 January 2021, the “old” rules, i.e. the limit up to CZK 300,000 annually, apply to the deduction of interests from loan used for their ensuring from the tax base. The same rules apply also to the loan used for refunding of such original loan, regardless the fact whether it will be used after 1 January 2021 (the Financial Administration took a stand to different situations which may occur).
For housing needs ensured after 1 January 2021, a new limit for deduction of interests - CZK 150,000 - applies.
Right to build and taxes
A right to build was introduced into the legal system newly in 2014 as a counterbalance to a principle stating that a construction forms a part of land. Recently, it has been more often used practically and it deserves a separate reference.
A right to build is, by law, real estate. A right to build entitles another person than a land owner to establish or have his/her own construction on the land.
- Person for whom a right to build is created is obliged to file a tax return and pay a real estate tax for the land for which such right has been created (instead of a land owner);
- By creating a right to build for the land owned by the Czech Republic, a municipality, or by a region, the exemption of the land from the land tax terminates;
- Exemption of the income from sale of a right to build from the natural person income tax has its own 5-year or 10-year “waiting period” which starts when the registration of a right to build in the Land Register becomes effective (condition for income tax exemption is existence of a construction);
- Costs expended to acquire a right to build may be applied by a payer not keeping accounts as tax deductible costs only in the form of subsequent depreciations;
- Income for a land owner for creation of a right to build is subject to the income tax;
- From the viewpoint of VAT, a right to build is a commodity;
- Supply (purchase) of a right to build, not including a construction, is not exempted from VAT, natural person income tax, or real estate acquisition tax;
- Creation of a right to build for consideration was subject to a real estate acquisition tax;
- Extension of the period of a right to build was taxed as real estate acquisition as well.
ARROWS advisory group
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