Tax obligations when selling a property

Income tax on the sale of real estate

The very first tax we need to mention concerns the seller. This is income tax, sometimes inaccurately referred to as real estate sales tax, which is 15% of the profit, i.e. the difference between the sale and purchase price of the property. Expenses related to the sale (commission to the real estate agent, preparation of the sale and purchase contract, expert opinions) or the reconstruction of the property are deducted from the sale price (however, only such modifications are included that are directly related to the property’s appreciation, e.g. replacement of windows or insulation). If the purchase price, after adding the costs of reconstruction and sale, exceeds the sale price, no tax is of course payable because no profit was made.

Before you start calculating how much tax you’ll pay on the sale of your property, see if any of the exemptions apply to you. In fact, a significant number of sellers are completely exempt from the tax. You don’t pay tax if you meet at least one of the following conditions:

• You have owned the property for at least 5 years, or 10 years (the 10-year period applies to properties acquired after 1 January 2021, and the 5-year period continues to apply to previously acquired properties). The so-called time test starts from scratch for every subsequent transfer of real estate, not only for the sale but also for the gift of real estate. The only exception is the inheritance of real estate in the direct line, where the period during which the property was owned by the previous owner is also counted. This condition applies to flats in so-called “personal” ownership as well as to shares in a cooperative, i.e. cooperative flats.
• You have occupied the property yourself for at least two years before the sale. This does not have to be a permanent residence registered on your ID card, you only need to prove that you actually used the property. This can be proved by, among other things, documents proving that you have registered the internet or energy in your name, or by correspondence delivered to the address (e.g. bank statements or energy bills). In any case, however, it must be a privately owned flat; this exception does not apply to cooperative flats.
• You have occupied the property for less than two years, but you will use all the money you get from the sale to meet your own housing needs within one year. Housing needs are not only the acquisition of a new house, flat or land, but also the construction or renovation of any building intended for permanent housing. You can also use the money to repay part of the loan you obtained for your new home. You will also meet the condition if you have invested a corresponding amount in the new home in the year before the sale. However, this activity must be reported and subsequently proved to the tax authorities, who may exempt you from tax.

However, all exemptions only apply to individuals. If the property is included in business assets, the tax must be paid in any case. If you are an individual and meet any of the conditions for exemption, you do not have to include the income from the sale of the property in your tax return at all.

VAT on the sale of real estate

If the seller is a VAT payer and is not subject to one of the exemptions, he/she must also pay VAT at the rate of 21% of the property price (or 15% in the case of so-called social flats and houses).

When is VAT not payable?

• The seller is a natural person and is not subject to VAT.
• The subject of the sale is an apartment or house where more than five years have elapsed since construction or major renovation followed by a new approval.
• It is not a repeat sale which would be the subject of a business activity.
• The sale does not include building land or land which forms a single unit with a building (if the building is subject to VAT).

When is VAT payable?

The seller is subject to VAT and the object of the sale:

• an apartment or house that was built or substantially reconstructed (subject to approval) less than five years ago,
• land which forms a single unit with the property,
• land intended for development.

Real estate tax

While the previous two taxes are paid on a one-off basis, property tax is an annual affair and applies to every property owner. It is therefore payable by the purchaser after the transfer of the property. The tax must be paid by anyone who owns any property on 1 January. Each owner declares himself or herself liable for the tax by filing a tax return with the local tax office by 31 January of the year for which the tax is first payable. In subsequent years, it is no longer necessary to file the tax return again, only to pay the tax itself.

However, the seller can opt out of the property tax so as not to pay the tax himself. In most cases, however, the tax office will find out that the property has been sold so that the new owner applies for the tax and files the tax return himself. The tax office will then de-register the former owner itself. However, if the seller does not want to rely on this, he or she can and should file a property tax disclaimer and support it with an extract from the Land Registry. Then he assumes no risk.

Entrust your sale, purchase and tax obligations to the experts

At Affordable Lawyer, we protect the rights of sellers and buyers. We already know exactly which contracts need to be prepared and which obligations must not be forgotten. We will be happy to walk you through the entire process and make sure that everything goes smoothly from a legal point of view, without any mistakes that could lead to a significant delay in the sale or a significant financial loss.

Summary

The main tax liability of the seller is to pay income tax on the sale of the property, which is 15% of the difference between the sale price and the purchase price. Costs associated with the renovation and sale are also included in the calculation, but only those that have directly contributed to the increase in value of the property. There are exemptions that may exempt you from this tax. For example, the seller does not have to pay the tax if they have owned the property for at least 5 years or occupied the property for at least 2 years before the sale. Another exemption is to invest the proceeds of the sale to meet your own housing needs.

VAT payers must also take into account the 21% VAT (or 15% for social housing) when selling the property. There are specific conditions where VAT is not payable, for example when selling a property older than 5 years (since construction).

Property tax is also payable annually by each property owner. When selling a property, the buyer is obliged to pay this tax, but the seller can file an opt-out to avoid any potential risks.