Income tax on the sale of real estate – how to declare it and the correct procedure?

We have discussed what taxes are payable on the transfer of real estate in a previous article. In today’s article, we will focus mainly on how to correctly declare and comply with the income tax liability .

When is the tax on the sale of real estate not payable

This is where every seller should take heed, because while sales tax directly applies to them, there are many exemptions that can exempt them from paying the tax. These are mainly the following situations:

• The seller has owned the property for at least 5 years (for properties acquired after 1 January 2021, this period is extended to 10 years).
• The seller inherited the property in a direct line and the time test (ownership for 5/10 years) was met by the previous owner.
• The seller has lived in the property for at least two years prior to the sale. However, it does not have to be a permanent residence, only a real residence.
• The seller will use the money from the sale to meet their own housing needs.
• This is not a traditional sale of the property, but a transfer of the cooperative share and the rights to rent the flat with it.

The reporting obligation arises even if you don’t pay tax

Do you meet any of the above conditions? Then you do not have to pay any tax, but you will need to comply with the legal obligation to inform the tax office of the sale. Since 2015, there is an obligation to notify the tax office of any tax-exempt income if its value exceeds the threshold of CZK 5 million. Until the end of 2020, real estate was exempt because the tax office could easily obtain information about sales from the land register. From 1 January 2021, however, the income from the sale of real estate must be declared and at the same time it must be documented that one of the conditions for tax exemption has been met. In the case of the sale of a cooperative apartment, the reporting obligation will always arise, regardless of the amount of income.

It is certainly not worth circumventing the notification obligation or even forgetting about it. If the income is not reported on time (or even not reported at all), there is a penalty. The maximum penalty is 15% of the unreported income. In practice, however, it usually does not reach this level.

The notification does not have a prescribed form. However, the Ministry of Finance has issued a model form. The notification can be made in writing, either in paper form or electronically, or orally on the record. It can also be filed electronically, but only by a data message with a verified identity.

Žena podepisující formuláře k dani z příjmu z prodeje nemovitosti

What if income tax has to be paid on the sale of the property?

If none of the exemptions apply to you, you will need to pay the tax. The sale of a property is income like any other, so it is included in your tax return, which is normally due by 31 March the following year. Income from the sale of real estate is governed by the Czech National Council Act on Income Taxes (Act No. 586/1992 Coll.), where it falls under other income treated in Section 10.

A tax return must be filed in any case in the case of a sale of real estate that is not exempt from tax. The annual tax settlement made by the employer is not sufficient. The tax return must then also be filed by a pensioner or other person with no other taxable income.

Tax return on sale of property

When completing your tax return, you will be particularly interested in Schedule 2, where you list the sale price of the property and the expenses you had to pay for the property and in connection with its sale. The taxable amount is the net profit, i.e. the difference between the amount spent and the costs of acquiring and then transferring the property.

Include in the expenses not only the purchase price of the property (the price you paid for it yourself when you bought it), but also the costs associated with the sale of the property (cleaning, alterations and clearance costs, fees for arranging the sale, costs of preparing contracts and other documents, or perhaps a solicitor’s fee for safekeeping the money), as well as the amount invested in any renovations. However, in this respect, expenditure is only understood to be modifications that have led to the appreciation of the property, e.g. insulation of the house, replacement of windows, etc.

What about if you have acquired the property for free and there is therefore no purchase price? In the case of an inheritance, the purchase price is the amount stated in the court decision, whereas in the case of a donated property, you need to have an expert’s report (valid on the date the property was transferred to the new owner). This amount is then stated as the purchase price and is supplemented by the standard expenses related to the renovation and sale of the property.

Tax rebates

Tax credits are normally used to reduce tax on income from employment. However, if you don’t have such income, you can use tax credits on income from the sale of property. In addition to the basic taxpayer discount, other discounts are available. The most common are:

• student discount,
• school fees,
• disability and disability allowance,
• spouse discount without taxable income.

The same is true for tax deductions. Certain other items can be deducted from the tax base:

• mortgage loan interest,
• interest on building savings,
• life insurance or pension insurance,
• the cost of educational qualifications,
• union membership fees,

Entrust us with the sale of the property and tax obligations

We’ll make sure your rights are protected and all legal obligations are met. We know which contracts need to be prepared, what needs to be processed at the Land Registry and how to meet all tax obligations. We will guide you through the whole process or any part of it and make sure everything is done legally correctly.