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Income tax issues on the sale of real estate
29/03 2024 Karel Mráz Copy URLShare

Income tax issues on the sale of real estate

How does income tax work on the sale of property? What is its amount and when are you exempt from the tax? These are just some of the questions we will answer below.

The difference between property tax and income tax on the sale of real estate:

For a better understanding, we need to distinguish between the real estate sales tax and the property tax itself. Property tax is payable by owners of real estate (land, buildings, apartments, etc.) every year. The obligation to file a tax return for this tax with the competent real estate tax authority is by 31 January each year. The tax is due on 31 May. Except in two instalments by 30 November if the amount exceeds CZK 5,000. It is therefore a regular tax payment related to the ownership of any real estate.
Income tax on the sale of the property is payable if the seller has made any profit on the sale. As part of filing the income tax return for the previous year, the purchase price at which the property was sold must then be shown as income. This is reduced by the costs of acquiring the property and any other related expenses, which may include, for example, the cost of valuations, legal costs, estate agency costs, technical improvements and repairs to the property. In sum, this is a one-off tax payment related to the income from the sale of a particular property.

Amount of income tax

The sale of real estate is therefore subject to income tax under Section 10 of the Income Tax Act. The amount depends on, for example, whether you sell the property as an individual or a legal entity, what your total annual income is and also, for example, in what year you sold the property.
The personal income tax is 15% or 23% percent depending on your total annual income.
In 2023, the tax is 15% on income up to CZK 1.935.552, - (48 times the average gross salary for 2023). Income above this amount is taxed at 23%.
For 2024 this calculation has been changed due to the consolidation package. The new tax rate is 15% on total income up to CZK 1,582,812 (36 times the average gross wage for 2024). For income above this amount, a rate of 23% is applied.
For legal entities, the tax rate is 19% for income for 2023 and now 21% for income for 2024. Any income from sales is again included in the company's total income and must be taken into account in the company's tax return.

Exemption from income tax on the sale of real estate

Exemption of individuals from income tax is possible in cases regulated by Section 4 of the Income Tax Act.

A. Time test
Income from the sale of immovable property may be exempt from tax if a period of more than 10 years has elapsed between the acquisition of title to the property and its eventual sale. An important caveat to this. The new time test, effective from 2021, only applies to properties acquired from 1.1.2021. All properties acquired before 31.12.2020 are still subject to the original 5 year time limit.

B. Residence in the sold property
Income from the sale of real estate is also exempt from real estate sales tax if the seller has resided in the property for at least 2 years immediately prior to the sale. At the same time, the seller does not have to have a permanent residence at the address. However, if he/she has, this will make his/her situation before the tax office much easier. Otherwise, he must prove that he actually occupied the property for 2 years. For example, by paying for utilities, internet, neighbors' testimony, mail sent to his address...

C. Using the proceeds of the sale to provide for his own housing needs
Funds received from the sale of a property may also be exempted from income tax if they are used to provide for one's own housing needs. In addition to the construction and purchase of the property, housing needs include, for example:
- the repayment of a deposit to a legal entity for the purpose of obtaining the right to rent or otherwise use an apartment or family house,
- maintenance and alteration of the property,
- the settlement of the matrimonial property or the settlement of joint heirs where the settlement is for the payment of the share associated with the acquisition of the property,
- consideration for the transfer of a share in a business corporation by a member thereof made in connection with the transfer of the right to rent or otherwise use a dwelling with
- the payment of a loan or borrowing used to finance the aforementioned housing needs, if the conditions for such needs are met.

An addition to this, funds from the sale of real estate invested in housing, in the sense of purchasing land, can only be exempted from tax provided that construction is commenced within 4 years of the acquisition of the land.
Fixed time limits apply to the use of funds from the sale of immovable property for the acquisition of housing, one of the options mentioned above:
a. no later than the end of the tax year following the tax year in which the funds were acquired
b. or the use of the funds prior to their acquisition, but not earlier than in the tax year immediately preceding the tax year in which the taxpayer acquired the funds

Example:
In 2024, a property is sold and the seller receives an amount of EUR 5 million. The buyer receives CZK 5,000 from the sale of an apartment. This amount will be exempt from income tax if the seller invests the amount of 5 million to address his housing needs between 1 January 2023 and 31 December 2025.

Notification obligation

In 2021, the conditions for being able to claim income tax exemption on the sale of property when using the proceeds to provide for one's own housing needs were tightened. It is not sufficient to simply provide evidence of the use of the proceeds of the sale to acquire a home. If the taxpayer uses or has used the funds obtained from the sale of the property in this way, he must notify the tax authorities of this fact within the time limit for filing the tax return for the tax year in which the funds were obtained. Where the seller (taxpayer) fails to do so, he will not be able to claim the income tax exemption, although he would have met the other conditions.
Should the funds received from the sale not ultimately be used to provide for the taxpayer's own housing needs, the income must be taxed as other income.

Exemption from tax on the sale of a cooperative share

The advantage of the tax exemption for the transfer of cooperative shares is the 5-year time test. Thus, the extension of this period from 5 to 10 years as in the case of freehold property does not apply here.
On the other hand, when selling a cooperative share, the condition of previous residence for 2 years cannot be applied as in the case of the sale of a freehold property. The exemption also applies to sales where the funds are used to meet the owner's own housing needs.
When a condominium unit is transferred to personal ownership, the 5-year time test is still applied and the period of time the unit has been in personal ownership is added to the period of time the property has been owned as a condominium and used for residential purposes.

Tax on the sale of property acquired by inheritance

For property acquired by inheritance, you again need to work with the time tests for income tax exemption on its sale. The exemption is therefore possible provided that we have owned the property for at least 5 years, or 10 years for freehold properties acquired from 1 January 2021.
The period during which the property was owned or lived in by the deceased can also be counted here. However, this only applies if the inheritance is in the direct line (husband, wife, children, grandchildren, parents, grandparents).

Example:
If an heir acquires a property from his father who owned it for 15 years, he does not pay income tax on the sale. Similarly, if the father lived in the apartment for 1 year and then the heir for 1 year, for example, he will be exempt from tax.

Tax on the sale of property acquired by donation

The same timing tests we explained above apply to real estate acquired by gift, except that their time limit begins to run when the gift is received. Here, the rule for satisfying the time test by counting the period during which the donor owned or resided in the property cannot be applied. Even if the donor was a direct relative.

Exemption from income tax on the sale of immovable property acquired by gift can be obtained provided that the proceeds are used for the acquisition of one's own housing needs. Here again, it is first of all necessary to notify the tax authorities of the acquisition of the proceeds of the sale before the end of the tax return filing period. If this is not done, the tax exemption cannot be used.

As with property acquired by inheritance, the proceeds from the sale of the gifted property can be reduced by the expenses. This is determined as the value of the property at the time of the gift, as determined by a valuer. Tax is then payable on the difference between this value and the sale price.

If you have a question about this topic and are unsure, we will be happy to provide a no-obligation consultation to help you.

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