Dear readers,
As the deadline for filing an electronic personal income tax return is soon to expire (2 May 2023), you may wonder whether income that you received in 2022 is a tax exempt income. This article brings a listing of most common cases of personal income tax exemption; in this section, we focus on income from sale of immovable assets (exclusive of those that were included in business assets).
First of all we draw attention to the fact that tax-exempt income above CZK 5,000,000 has to be notified to a Tax Office (please refer to an article from the previous month covering this topic on our blog). However, the duty to file the notification does not apply to sales of immovable assets entered in the Real Estate Register.
1 Income from Sale of a Family House or Residential Unit (with a Place of Residence)
Income from the sale of a family house (and attached land) or a residential unit (that does not include non-residential premises other than a garage, cellar or storeroom) is exempt from personal income tax if it was your place of residence for a minimum of two years immediately before the sale.
Example 1: Mr. Novák purchased an apartment in 2005 and had lived therein all the time since that date; in 2022, he generated income by selling the apartment – Mr. Novák is not obliged to disclose his income from the apartment’s sale in a tax return for 2022 because the income is tax exempt. Mr. Novák is not obliged to notify the tax administrator of the tax-exempt income.
If the residence time test (two years before the sale) fails to be complied with, the income from the sale is tax exempt in case that the finance is used to meet one’s own housing needs (e.g. to build/purchase a family or residential house/residential unit). This fact must be communicated to a Tax Office (within the deadline for the tax return’s filing) and the acquired finance must be used for one’s own housing needs by the end of the year following the year when the finance was acquired.
If the finance is not used to meet one’s own housing needs after all, the tax exemption eligibility conditions fail to be met and the income must be included in a tax return as other income pursuant to Section 10 of the Income Tax Act. Expense in the form the immovable asset’s acquisition cost can be used against the income (or the acquisition cost can be increased by costs of technical improvements, repairs or maintenance, as the case may be).
Example 2: Mr. Novák purchased as apartment in August 2021 and lived therein; subsequently, he sold it in 2022 and received the related income. Mr. Novák filed a notification with a Tax Office as early as in February 2023. In April 2023, Mr. Novák bought a family house, using the finance obtained from the apartment’s sale. Mr. Novák met any and all tax exemption conditions, and the tax-exempt income does not have to be reported to the Tax Office.
2 Income from Sale of Immovable Assets (Other Cases)
Where the condition involving the place of residence fails to be met with regard to tax exemption of income from the sale of a family house/residential unit (see the previous section), or where the finance is not used to meet one’s housing needs (a place of residence for a period of time shorter than two years), the income can be tax exempt based on the ownership time test.
The ownership time test is also material in applying tax exemption to income from the sale of other immovable assets, i.e. assets other than a family house or a residential unit (the existence of the place of residence is irrelevant in such case).
If you acquired the immovable asset (such as a residential house, non-residential unit, land, etc.) before 31 December 2020, the income from such asset’s sale will be tax exempt in case that the period of time between the acquisition and the sale will be greater than five years.
Where the time test fails, the income cannot be tax exempt and must be included in the tax return as other income pursuant to Section 10 of the Income Tax Act. If the time test fails, contingent exemption, i.e. the possibility of applying the exemption due to using the obtained finance to meet one’s own housing needs, does not apply.
Example 3: Mr. Novák acquired a residential house in 2012. He decided to sell it in 2021, but managed to do so only in 2022 when he obtained income from that sale. Mr. Novák is not obliged to disclose the income from the residential house’s sale in his tax return for 2022 because the income is exempt from tax. In addition to this, Mr. Novák is not obliged to notify the tax administrator of the tax-exempt income.
If you acquired the immovable asset (such as a residential house, non-residential unit, land, etc.) after 1 January 2021, the income from such asset’s sale will be tax exempt in case that the period of time between the acquisition and the sale will be greater than ten years.
Where the time test fails, the tax exemption applies to income that will be used to meet one’s own housing needs (see above) if all conditions are met (a notification filed with a Tax Office, the deadline for the acquired finance’s use); with regard to immovable assets acquired after 1 January 2021, contingent exemption can be applied, i.e. exemption as a result of obtained finance used to meet one’s own housing needs.
Example 4: Mr. Novák purchased land in May 2021. He sold it in April 2022 and obtained finance a month later. Mr. Novák decided to acquire a family house with the use of the obtained finance, and communicated this fact to a Tax Office as early as in March 2023 (Mr. Novák does not have a data box or a tax advisor). Hence, he met the first condition to apply tax exemption. In April 2023, Mr. Novák acquired a family house and used the finance obtained from selling the land to buy the house (having a certain amount of the finance from the land’s sale left). The income from the land’s sale is only partly tax exempt for Mr. Novák (in the proportion of the finance used to purchase the family house). Mr. Novák is obliged to include the tax non-exempt portion of the income in his tax return for 2022 as other income pursuant to Section 10 of the Income Tax Act.
This short summary informs about potential tax exemption applicable to income from the sale of immovable assets, bringing also examples from an everyday life. However, this summary cannot replace a consideration by a tax advisor and is not exhaustive. Did you experience division of estates and are unsure about next steps? Did you sell a cooperative apartment and have doubts if identical conditions apply in considering potential tax exemption? Did you sell an immovable asset that you acquired in an inheritance procedure and have no idea what is such fact’s role in considering the tax exemption time test? We will be happy to answer these as well as any other questions. Please feel free to contact us.
Michaela Kozminská Tomáš Brůček
kozminska@edmutilitas.cz brucek@edmutilitas.cz