Abolition of the Real estate acquisition tax — what is changing in practice?

Article chapters:

• How acquired real estate has been taxed so far
• Real estate acquisition tax currently
• Buying or Selling Real Estate
• What you need to know about the abolition of property acquisition tax
• Related changes in the Income Tax Act

How acquired real estate has been taxed so far

The tax was 4% of the purchase price of the property (with certain exceptions),

The obligation to the pay real estate acquisition tax has been part of the tax system since 1992, originally enshrined in Act no. 357/1992 Coll., on inheritance tax, gift tax and real estate transfer tax. However, there was a change in 2014, and the mentioned law was abolished and the tax on the acquisition of real estate was set, which was also currently being discussed. Over the years, it has slightly changed its form, or more precisely, the rule for its payment has stabilized. Previously, the buyer could agree with the seller who will pay it, but from 1 November 2016, by law, it was only a matter for the buyer.

The tax was paid for the property acquired, according to the following:

• property, buildings or housing units owned in the Czech Republic
• authorized construction completed in the Czech Republic area
• shares in real property within the two previous points

The real estate acquisition tax did not apply to:

• inherited and gifted real estate
• new buildings within 5 years of approval, for their first owners
• cooperative flats – even in the case of transfer to personal ownership

Real estate acquisition tax currently

The real estate acquisition tax has been abolished and the relevant date in this regard is 31 March 2020. This can be translated into the world of finance, in that as a buyer you will normally save tens to hundreds of thousands of crowns.

Buying or Selling Real Estate

We provide a complete legal service related to the purchase or sale of real estate, including the reservation contract and the escrow of the purchase price. We will also help with Land Registry issues and proper tax filing. We work quickly and precisely so you can feel confident and don’t have to worry. You can also pay after the service is provided.

What you need to know about the abolition of property acquisition tax

The amendment to the law applies retroactively

You do not pay a real estate acquisition tax if you purchased your property during the period beginning from 1 December 2019. The property registration in the Land Registry herefore took place in December 2019 or later, and the deadline for filing a tax return was 31 March 2020 (with a delay to 18 August 2020 due to the Covid-19 pandemic). So it is possible that you are not subject to the tax, even if you signed the contracts in the autumn of last year before December, but the property registration was not made until December.

Real estate acquisition tax refund

You may be in a situation where you are tax exempt but you have already paid the tax. According to the amendment to the law, you are entitled to a refund, but be careful – this does not happen automatically, you must apply for the overpayment at the local tax office. The Financial Administration has already published on its website a model application for a refund of the overpayment of the real estate acquisition tax. Despite this, prepare a property registration for the Land Registry as a proof, just in case. You will have your money back within 30 days of submitting the application (in the case that you do not have other tax arrears).

You must tax “older” properties

If you do not meet the deadline (therefore, the property registration in the Land Registry took place before December 2019), then you are liable for the tax according to the original law – you must declare the property for tax purposes, and then pay the required amount to the tax office. However, you have most likely already done so.

Related changes in the Income Tax Act

Following the abolition of the real estate acquisition tax, there are further changes in the area of personal income tax. First, there is the matter of a reduction in the amount of the deduction you may claim for mortgage interest. Second, there is a raising of the limit of the time test allowed for the exemption of income from the sale of real estate. We will cover both issues now.

Reduction of the interest deduction from CZK 300 000 to CZK 150 000

We are talking about the maximum amount that you, as a buyer within one household, can deduct from your income tax for mortgage interest. From the current 300.000 CZK, the new limit is reduced to 150.000 CZK, which in the end reduces your chances of saving on your tax bill.

Interest is counted down from the assessment base of the so-called non-taxable portion, and its amount depends on the interest rate and the number of years you have left until the end of your housing loan. Your specific tax savings thus represents 15% of the amount of paid interest. If we look at the discussed limit values, with the current limit of 300.000 CZK, the maximum saving is 45.000 CZK (300,000 × 0.15). With the new limit value set at 150.000 CZK, you will save now only 22.500 CZK (150,000 × 0.15). Of course, not everyone reaches these maximums.

When and how does the new rule work?

• Applies to mortgages taken out from 1 January 2021
• Includes the acquisition of an apartment, house or land, but also service, repairs and reconstruction (including apartments for rent or other use), the acquisition of a membership share in a housing cooperative, etc.
• The limit of CZK 300.000 continues to apply to housing needs acquired before January 2022 (including later refinancing)

In general, you can only claim a mortgage interest deduction once a year on your tax return or in the annual tax settlement. You lose your right to it at the point when you pay less in income tax per year than the annual taxpayer discount (currently CZK 24.840). Furthermore, this also applies in cases where you work for less than the minimum wage, or you work on the basis of an agreement to perform work with less than 10.000 CZK income per month, or you are a self-employed person with a low profit and your tax liability does not exceed 24.840 CZK.

Extension of the time test from 5 to 10 years

We are now moving to the seller’s side. Income from the sale of real estate of course must be included in your tax return, based on the income tax from the sale of real estate at a rate of 15%. However, there are exceptions when you are exempt from this tax. One of them is the fulfillment of the so-called time test, which means the time you lived in or owned the property. This time is extended from the original 5 to currently 10 years via the amendment to the law for real estate not used for ownership living. In practice, this means that if you sell such an object within 10 years of its acquisition, you must pay income tax on any profits.

What you need to take note of in the extended time test

• It is valid only from 1 January 2021. For properties that you have acquired before this date, there is still a 5-year period.
• It refers to real estate that is not used for your own living (typically holiday homes, an apartment where your parents live, non-residential premises, or land or real estate held as an investment).
• Nothing changes regarding places of residence. Any sale of such real estate is exempt from personal income tax after only two years. However, the condition is that it must be the address of permanent residence – otherwise this property also falls under the extended time test.

Buying and selling real estate is an important process, not only in terms of tax obligations. There are also other requirements and of course many risks in case of noncompliance. If you are wise enough not to carry out the transaction by yourself without legal assistance, take a look at our offer of our legal services. We are ready to help you anytime.

Are you dealing with a similar problem as talked about above?

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Buying or selling real estate?

We provide a complete legal service related to the purchase or sale of real estate, including the reservation contract and attorney escrow of the purchase price. We will also help with the Land Registry and taxes. We can do it quickly and correctly so that you don’t have to worry. You can also pay after the service is provided.