Did you inherit a property? What about inheritance tax?

Chapters of the article

• Inheritance tax on estates in 2023
• Inheritance and income tax
• Estate tax returns
• Donation of immovable property and inheritance proceedings
• Income tax on the sale of real estate

The situation with the inherited house was a real case of one of our clients, Mr. Zdeněk. He was the sole heir to a rather large estate from his father, which included a villa in Prague 6. Since our client had been living abroad for a long time, he did not have an accurate overview of the obligations that arise in connection with inheritance. Above all, with our help, he wanted to prepare all the documents for the tax authorities so that he would not forget anything and become a debtor. Going through the tax aspects of inheritance together also inspired us to write this text.

Inheritance tax in 2023

The issue of inheritance tax is a constant subject of enquiries directed to our law firm. Right at the outset, however, we have good news. Inheritance tax on both movable and immovable property was abolished at the end of 2013 and since 2014 inheritance is already completely tax-free.

Inheritance and income tax

Another question that probably immediately comes to mind for law-savvy individuals is what about income tax on inheritance. This is because, generally, tax liabilities relating to acquired property are dealt with under this regime. Inheritance is now seen as a gratuitous acquisition and the Income Tax Act also exempts it from income tax.

Thus, the heirs do not actually pay any tax on the estate of the deceased; they only pay the notary’s fee or other necessary expenses such as the fee of an expert, etc.

Real Estate Tax Return

Taxes related to newly acquired property (earnings, gift, etc.), i.e. taxes related to income as such, constitute one group. However, taxes related to the ownership of property, in this case inherited real estate, are another category.

Every property owner is obliged to register for tax. This can be done by filing a real estate tax return, which can be filed electronically or on paper. It is submitted to the tax administrator, which is the tax office in whose district the relevant land or building is located. The tax return is normally submitted by 31 January and includes all buildings acquired or altered in the previous year.

In relation to inherited property, the tax return applies to you if:

• You inherited the property in the previous year and are the current owner.
• You inherited the property a long time ago, but there was a significant change in the previous year that affected the tax assessed – e.g. a change in assessment, etc.
• You have sold part of the inherited property but still own the remaining part.

Donation of real estate and inheritance proceedings

The original donation of real estate, after which the donor dies, can also be a legally interesting situation. If this happens within three years of the transfer of the property, it may affect the subsequent succession proceedings. For example, a situation where a mother gifts her country house worth 3 million to her youngest son and then dies a year later. However, there are three siblings and in theory (if the gift had not been made) each would have been entitled to a share of CZK 1 million. However, since one of them received a cottage worth much more, only the remaining two siblings will share the estate.

Income tax on the sale of the property

Not paying tax on inherited property has its limits. The moment you inherit a cottage or house that you know you will not use in any way and you plan to sell it immediately, then you really need to be careful.

According to the Estate Tax Act, the heir would be exempt from income tax provided he has owned the property for more than five years. If the value of the inherited property exceeds CZK 5 million, the heir is obliged to report this fact to the tax office.

To make things less complicated, there is an exception here too. The above five-year period can be shortened for the benefit of the heirs, provided that:

• The testator (the person from whom the inheritance is made) was a relative in the direct line (typically a parent, but also a grandparent, possibly a child or grandchild) or a spouse. If there was an inheritance from an aunt, i.e. an inheritance in the indirect line, this exception would not apply.
• The property was demonstrably in the possession of the deceased for a certain period of time.

The five-year period is reduced by the period during which the property was in the possession of the testator.

In the case mentioned in the introduction, the previous owner, i.e. Mr Zdeněk’s father, had owned the house for twenty-five years. After deducting the five-year period, we would theoretically arrive at a figure of -20. In practice, this means that it is not necessary to wait to sell in order not to have to pay the tax. Mr. Zdeněk was therefore not limited by anything and could immediately sell his inherited property without paying income tax.

In the event that no exemption applies and income tax is eventually payable on the sale of the inherited property, the amount of the tax is calculated as 15% of the gain. However, the profit is not the amount for which the property is sold, i.e. for example CZK 10 million, but the difference between the sale price and the appraisal price for the inheritance proceedings.

If the estimate of the price of the house for the succession proceedings was CZK 9 million, but the heirs managed to sell it for CZK 10 million, then we would make a profit of one million, out of which we would pay the 15%. However, the costs associated with the investment in the property can still be deducted from the tax base. We have discussed this issue in more detail in our separate article.