When it is possible to exempt income from the sale of real estate from tax?

You can read our previous article on the topic "Deduction of the loan interests for housing purposes" here.

As an introduction to today’s topic, we would like to point out that it is essential to distinguish whether the real estate in question is intended (and used) for one's own housing or not.

Exemption for real estates intended for own housing

Income from the sale of real estate can be exempt if the taxpayer has resided there for at least 2 years immediately before the sale. The second condition for claiming this exemption is the type of property. As the exemption is linked to the own housing, only income from the sale of a family house or flat which does not include non-residential space other than a garage, cellar or storage room can be exempted in this way. Therefore, this exemption cannot be applied to non-residential premises such as detached garages.

However, the income from the above-mentioned properties can also be exempted if the taxpayer has resided in the real estate in question for less than two years but uses the income from its sale for the acquisition of another own housing.

Nevertheless, there are also cases where the taxpayer tries to exempt the income from the sale under this provision even though he has not fulfilled the condition of securing his own housing at all. In this respect, we would like to point out that this is considered an illegal activity. Tax authorities are vigilant in these matters and, if they suspect that the taxpayer has not fulfilled the condition, they will launch an investigation, which may include, among other things, questioning neighbours as witnesses. If, as a result of the investigation, it is proven that the conditions for exemption have not been met, the income tax is assessed, including resulting sanctions. At the same time, such a case may also be referred to the police for investigation of a possible criminal offence.

Exemption for real estate not intended for own housing

Of course, income from the sale of a real estate in which the taxpayer did not reside can also be exempt, but the conditions are considerably stricter. First of all, it should be noted that income from the sale of real estate classified as a business property and used for business purposes cannot enjoy the benefit of exemption.

It is also important to determine when the property in question was acquired, the cut-off point being 1 January 2021.

Income from the sale of real estate acquired before the end of 2020 can be exempt if the taxpayer has owned it for at least 5 years. This period is reduced by the period during which the real estate was demonstrably owned by the deceased if it was acquired by inheritance from a relative in the direct line (grandparents, parents, children) or from a spouse.

As of 1 January 2021, the above-mentioned time test was extended to 10 years.

On the other hand, income from the sale of such real estate acquired after 1 January 2021 may be exempt even if the 10-year ownership period is not met but the income from the sale is used to finance the taxpayer's own housing needs, provided that the taxpayer notifies the tax authority of this fact no later than by the end of the deadline for the submission of the tax return for the tax period in which the income was received.

At the same time, the time limit, within which the condition of the acquisition of the actual housing needs must be met, must also be taken into account. There are two options, which we will explain by way of example: A taxpayer sells immovable property in 2022 and he would like to exempt the income in connection with the financing of his own housing needs. The condition can be fulfilled if he uses the income for his own housing needs by the end of 2023 at the latest, or if he has used the amount corresponding to the income received for his own housing needs in 2021 at the earliest.

If the condition of using the income from the sale for the taxpayer's own housing needs is not subsequently fulfilled, then this income is taxed as other income in the tax period immediately following the tax period in which the taxpayer received the income, i.e. if the income was received in 2022, the income will be included in the tax return for the tax period of 2023. Further, should the housing need be met by commencing construction of the housing within 4 years of the acquisition of the land and it did not happen, this income is also treated as other income in the taxable period in which the time limit for commencement of construction expired (i.e., in our case, in the tax return for the tax period of 2026), and if the land was disposed before the expiration of such time limit, the income from the sale of the property is taxed in the taxable period in which the disposition of the land occurred.

Notification of exempt income

We would also like to emphasize that even if a taxpayer meets the conditions for tax exemption of the income from the sale of real estate, tax obligations remain.

If the taxpayer receives exempt income exceeding CZK 5 million, he is obliged to notify this fact to the tax administrator. The deadline for submission of the notification is the same as the deadline for submission of the personal income tax return for the tax period in which the income was received. The notification shall state the amount of the income, a description of the circumstances in which the income was acquired and the date on which the income was received. However, there are also exceptions to this, namely for cases where the tax administrator has access to the information listed above via public registers. As the tax administrator has access to the Real Estate Cadastre (as a public register), the taxpayer should be exempt from the obligation to make such notification in case of transfers of real estate. However, from the practical point of view, we recommend to submit the notification of exempt income even in this case of a sale of real estate. Certainly, it is necessary to submit the notification if it relates to a donation, inheritance etc.

If a taxpayer fails to submit a notification, even if he has incurred such an obligation, he is facing a penalty calculated on the amount of unannounced income. If the notification is made after the statutory deadline, but before the tax authority issue the call, the penalty is 0,1% of the amount of exempt income. Provided that you already received the call from the tax administrator, and you comply within the alternative period, the penalty is more severe, 10% of the exempt income. In the worst case, where you do not respond to the call, the penalty is 15% of the exempt income.

In conclusion, although it may not seem like it at the first glance, the topic of tax consequences in relation to real estates is certainly a rich one and if you are concerned about the pitfalls that may arise in this matter, you can have us evaluate the potential tax implications. We will be happy to assist you in this matter!