Tax aspects and practical advice for land exchange

Chapters of the article

• Conditions for payment of tax and tax exemption
• What is involved in the legal exchange of land?
• Payment of taxes

The most common reasons for exchanging land are optimization of land use, financial benefits, or various personal motivations. What is tricky about the whole transaction is that although it may not add a single crown to your account and is a non-cash transaction, there may still be a tax liability associated with it.

The exchange is treated by the Income Tax Act in the same way as a sale. Income is assessed as the difference between the market value of the property acquired and the property transferred (contributed to the exchange). This value is considered taxable income and is subject to personal income tax.

Conditions for payment of tax and exemption

A significant relief for property owners is the possibility of exemption from income tax if the land has been owned for a certain period of time. In the Czech Republic, income from the sale or exchange of real estate is exempt from tax if the property has been owned for more than 5 years; a 10-year period applies to land acquired after 2021. It is worth knowing about this possibility in advance as it can significantly affect your decision to exchange land.

What does a land exchange involve legally?

When exchanging land, do not forget about the legal aspects and careful preparation of the contractual documentation. It pays to include all relevant details in the contract, including an accurate description of both parcels, their market value and any other terms that are relevant to your transaction.

According to the Civil Code, in a contract of exchange, each party undertakes to transfer to the other the ownership of a thing in exchange for the other party’s obligation to transfer ownership of another thing. The provisions on the contract of sale apply mutatis mutandis, with each party being considered the seller in respect of the thing it is giving in exchange and the buyer in respect of the thing it is receiving.

The exchange of land may affect existing mortgages or financing. Before you decide to go ahead with the exchange, you need to check with your bank what impact the exchange may have on your existing financial obligations. In some cases, you may need to restructure your mortgage or negotiate new financing.

Paying taxes

Income tax

However, if the tax exemption does not apply to the exchangers, you must declare the income and pay the relevant tax. This applies where the value of the land received exceeds the value of the land given. In this case, the taxable amount is the difference between these values. It is therefore important to determine the value of both parcels carefully in order to determine the correct tax liability. The real property acquired is then always viewed as a non-monetary consideration for the purchase price. For income tax purposes, it must be valued in accordance with the Valuation Ordinance.

An expert’s report is also possible, but not necessary. If the resulting figure obtained is higher than CZK 30,000, then the income must be recorded in the personal income tax return.

Example:
Mr Karel has a set worth CZK 1 000 000. He exchanges it with Mr Jan for a field worth CZK 800 000. Mr Karel therefore receives non-cash income worth CZK 800 000 and Mr Jan receives non-cash income worth CZK 1 000 000. In addition, Mr Jan finances the entire transaction on an organisational basis, which costs him CZK 20 000. As a result, Mr Karel receives less value than he invested in the exchange and thus has no taxable income. Mr Jan receives land worth CZK 200 000 more than the price of his original property. At the same time, he can include the costs associated with the sale and arrives at a final amount of CZK 180 000, which is the amount that forms the tax base.

Tax on the acquisition of immovable property

This tax has been abolished for transfers occurring after 1 December 2019. It is therefore no longer necessary to deal with it for land purchases or exchanges.

Real estate transfer tax

Real estate tax is one of the property taxes. This tax is levied annually on the ownership of immovable property. If the ownership of real estate changes, it must also be declared in the real estate tax return. However, people often make the mistake of remembering these at the end of March (or later) along with their obligation to file an income tax return. However, the two obligations are not related and the real estate tax return must be filed by January 31 of each calendar year. I.e. if the exchange takes place in 2023, the new status must be declared in the real estate tax return, which must be filed by 31 January 2024.

Exemption from income tax

The Income Tax Act provides for various situations in which you can exempt your non-cash income from income tax. This is the case, for example, in the case of the sale or exchange of immovable property (even by way of exchange) if the taxpayer has resided there for at least 2 years prior to the transfer. Or if the period between the acquisition and the transfer of the immovable property (even by exchange) exceeded 5 years.

Theoretically, however, there may also be a situation where, although the transferor receives exempt income by way of exchange, the amount of the income has exceeded 5 million and must therefore be declared in a so-called exempt income notice. However, this is a situation that is more typical for a sale; we have not yet encountered it in our legal practice in the case of an exchange of real estate.

If the spouses are on one side of the exchange and the real estate being transferred is held jointly, only one of the spouses declares taxable income or exempt income.