Taxation of income from the sale of immovable property

This issue is relatively broad and Highgate addresses it comprehensively with regard to tax optimisation and legal structuring options. Some of the topics were discussed as part of our big conference on legal and tax investment structures in real estate (more information here). However, this topic is also a topic for individuals, so we have taken the liberty of writing down some of the basic background to property taxation. If you have any questions, would like to view a recording of the conference, or are interested in our comprehensive services, we are available to help.

The Income Tax Act regulates in relative detail the taxation of personal income, including income from the sale of real estate. According to the provisions of the law, income from the sale of real estate is classified as other income of individuals, which is included in the tax base and must be declared in the tax return. Such sales income may be taxed at a rate of up to 25% under certain conditions, and is also subject to a health levy of 15% of the taxable amount. However, there are also legally defined conditions that allow the income from the sale of real estate to be exempt from tax, which is important from the point of view of financial efficiency and tax optimisation.

Income from the sale of real estate

Income from the sale of immovable property is classified as other income under the Act, namely income from the transfer of ownership of immovable property. This applies except where the immovable property is used in connection with business income from other self-employment or rental income pursuant to Section 6(6)(a) of the Act. 1 and 2 of the Income Tax Act and is included in business assets.

Income from the transfer of ownership of immovable property may be income accruing to a taxpayer who uses the property for personal or business purposes and at the same time the property has not been classified as a commercial property or for rental purposes. If the taxpayer receives income from the sale of real estate that is not exempt from income tax, he or she is obliged to report this income in the tax return.

Income from the sale of real estate is treated as passive income of the taxpayer for tax purposes. Passive income also includes rental income from real estate, royalty income, interest and income from securities, etc. If a taxpayer earns taxable income in a tax year only from the sale of real estate, he or she is not entitled to reduce the tax base by deducting the non-taxable portions of the tax base, and cannot reduce the tax by the child tax bonus or mortgage interest paid. If an individual taxpayer earns only income from the sale of real estate, he or she is not subject to the legal obligation to register with the tax office.

An essential element in income taxation is determining when the income will be included in the tax base. The taxpayer shall include the income from the sale of real estate in the tax base or partial tax base in the relevant tax year in which it is received, regardless of the date of conclusion of the contract of sale or acquisition of ownership rights to the real estate.

Method and correct determination of the time of acquisition of immovable property

For the purposes of taxation, it is essential to correctly determine the moment of acquisition of ownership of the property. The moment of acquisition of immovable property depends on how it was acquired, whether by contract, inheritance or a decision of a public authority.

• Contract: The moment of acquisition of the property in a contract, e.g. purchase, gift or exchange is determined by the entry into the Land Registry. Therefore, it is not the date of receipt of the money nor the date of signing the contract that is decisive, but the date determined by the decision on the authorisation of the entry into the land register.
• Inheritance: in the case of inheritance, the moment of acquisition of the immovable property is determined on the date of the death of the testator, as the ownership is acquired on the death of the testator, not only on the entry in the land register.
• Decision of the state authority: When acquiring ownership of immovable property on the basis of a decision of a state authority, the moment of acquisition is determined by the date specified in the decision; if not specified in the decision, the ownership is acquired on the date of the decision becoming final.

The correct determination of this moment of acquisition of the real estate is essential for the correct assessment of the possibility of tax exemption of the income from the sale of the real estate.

Exemption of income from tax

It is important to remember that some income from the sale of real estate may be exempt from income tax under the provisions of the Act. The most common cases of exemption include:

• sale of real estate not included in commercial property: After the expiry of 5 years from the date of acquisition of the property, the income from the sale of such property is exempt from tax.
• Inheritance of real estate in direct line: if the real estate is inherited by a person in direct line, i.e. j. parents, children, or after a spouse, the income from the sale is exempt after 5 years from the date of the proven acquisition of the property in the ownership or co-ownership of the heirs.
• inheritance of immovable property in indirect succession: In case of inheritance from other relatives, e.g. sister, uncle, etc., the income from the sale of the property is exempt after five years from the date of acquisition of the property. In the case of inheritance, the time of acquisition is determined differently than in the case of a contractual transfer of immovable property, as in the case of inheritance, ownership is acquired by death of the testator, not by entry into the land register.
• sale of real estate issued under restitution laws or included in the bankruptcy estate
• the sale of real estate included in commercial property: The exemption applies to the proceeds from the sale of immovable property included in commercial property, after a period of 5 years from the date of removal of the property from commercial property.

If the income is exempt from tax, it is not necessary to report this income on the tax return. However, even in such a case, the taxpayer may be obliged to file a tax return for other reasons. Therefore, it is important to consult with a professional or monitor changes in tax regulations to minimize the possibility of breaking the law and incurring unforeseen tax liabilities.

Possible tax expenses

Tax expenses are an important aspect in the taxation of income from the sale of real estate. Their application depends on how the property was acquired and the purpose for which the property was used. The buyer can claim the purchase price paid, in case of inheritance it is the general price of the real estate determined in the inheritance order.

In the case of a donation, the application of the expenses examines whether the income was exempt with the donor at the time of the donation of the immovable property. If the income would be an exempt expense for the donor, the value of the property is the value as determined by a forensic expert at the time of the gift. If the gift income would not have been exempt with the donor at the time of the gift, the expenditure with the donor is the purchase price of the property for which the donor acquired the property. In addition to the expenses related to the purchase, inheritance or gift of the property, the taxpayer can also reduce the tax base by other expenses:

• Expenditure on the acquisition of assets: This includes, for example, interest on a mortgage, fees associated with a loan, the cost of building materials or services used to construct the property.
• Expenditure on technical evaluation, repair and maintenance: This includes funds spent on the repair, maintenance and technical improvement of the property, such as the cost of roof repairs, legal services, etc.

These expenses can be claimed on the tax return, reducing the tax base and avoiding overtaxation. The taxpayer can claim tax expenses in the tax return up to a maximum of the income from the sale of the property, so there can be no tax loss where the tax expenses exceed the taxable income.

Tax burdens and health levies

Income from the sale of real estate, as outlined in the introduction, is subject to both income tax and health levies. Income that is not exempt from tax is subject to taxation at specific rates determined by the Income Tax Act. These rates depend on the size of the tax base and can be as high as 25% for higher incomes. The tax base is calculated as the sum of income from employment, income from entrepreneurship and other self-employment and other income earned in the relevant tax period.

If the taxpayer’s tax base does not exceed €47,537.98 (for 2024), the 19% rate applies. The amount above this threshold is taxed at 25%. In addition to the above tax burden, the income from the sale of the property is also subject to a health levy of 15% of the assessment base. These contributions are calculated by the health insurer in the annual health insurance statement after the tax return is filed. Taxpayers have the option to reduce their tax base by the health levies paid in the following tax year.

Example for calculating income tax for an individual whose taxable income from the sale of real estate exceeds EUR 60,000

The taxpayer calculates tax on the tax base of EUR 47 537.98 at a rate of 19 %, i.e. j. EUR 9 032.22 and on the amount exceeding EUR 47 537.98 (i.e. on the amount of EUR 12 462.02) it calculates the tax at a rate of 25%, i.e. j. EUR 3 115,51. The tax liability is therefore the sum of 9 032,22 and 3 115,51, which is a total of EUR 12 147,73.

In the last four years, the Financial Administration has been undertaking the so-called. letter campaign. This is an action to remind taxpayers of the obligation to file a tax return and pay tax on the income from the sale of real estate. Based on data from the Real Estate Cadastre, it sends letters to taxpayers who may become liable for tax in connection with the sale of a house, cottage or garage within five years of their acquisition. These letters serve as a reminder of their tax responsibilities. In terms of tax, the tax administration focused in particular on properties where there had been at least two changes of ownership within a five-year period. It has to be said that the previous actions were very successful and brought EUR 29 million to the state budget.[1]

Compliance with relevant tax obligations and understanding tax exemptions are key aspects to minimise the risk of unwanted consequences such as penalties or fines from tax authorities. Given the complexity of the Income Tax Act and the particularities of individual income taxation, it is advisable for individuals to take all steps to help them avoid potential risks of non-compliance with their tax obligations. Such a step can be a consultation with a tax specialist who will assess the specifics and provide the necessary advice and knowledge to properly meet your tax obligations. This is the only way they can manage their financial affairs effectively and minimise the risk of tax problems in the future.

---

[1] Source: https://www.financnasprava.sk/sk/pre-media/novinky/archiv-noviniek/detail-novinky/_prizn-nehnut-ts/bc