How to Avoid Paying Income Tax When Selling Real Estate in the Czech Republic

When selling real estate in the Czech Republic, the income generated from the sale may be subject to personal income tax. This tax applies to the profit made from the sale, which is calculated as the difference between the sale price and any associated expenses, and falls under Article 10 of the Income Tax Act.

In certain cases, it is possible to exempt this income from taxation. The eligibility for exemption depends on various factors outlined in the Income Tax Act. By meeting specific conditions for tax exemption, sellers can potentially save substantial amounts on their tax liabilities.

Taxation of Income from the Sale of Real Estate

When selling real estate, it’s crucial to understand the tax liabilities that the seller may face. Income from the sale of real estate is classified as “Other Income” under Section 10 of the Income Tax Act, unless it qualifies for an exemption. Therefore, it’s important to know what constitutes taxable income and which expenses can be deducted.

The taxable income from the sale of real estate is the total amount received from the buyer. This income must be reported on your tax return and is subject to the applicable personal income tax rate, unless it meets specific exemption criteria. However, sellers can deduct certain expenses related to the sale from this income.

By understanding these aspects, sellers can better navigate their tax obligations and potentially reduce their taxable income when selling real estate.

The Test of Time: Five or Ten Years?

One of the most common ways to achieve tax exemption on the sale of real estate is through the “test of time.” If a seller has owned a property for more than ten years, the income from its sale is exempt from taxation. This period is calculated from the date the property was acquired until the date it is sold.

The ownership period also includes time during which the property was owned by the last testator. In cases where the property was inherited, the ownership duration is extended to include the time it was held by the deceased owner.

Another Time Test: “Lived for Two Years Immediately Before Sale”

Another way to qualify for a tax exemption on the proceeds from the sale of real estate is to have lived in the property as your primary residence for at least two years immediately before the sale. In this case, the burden of proof falls on the taxpayer, but it’s important to note that registration at the property is not required.

To demonstrate that the property was indeed your primary residence, you will need to provide evidence. Acceptable forms of proof may include:

• Affidavits from Neighbors: Statements confirming your residency.
• Mail Sent to the Address: Documentation showing that you received mail at the property.
• Employment Records: Evidence of working nearby or commuting from the property.

By gathering this evidence, you can substantiate your claim for tax exemption based on your residency in the property.

Time Test Not Met, But Sale Proceeds Used to Buy a Home

If a property seller does not meet the time test and has not lived in the property, there is still an option to exempt the income from taxation. Specifically, the income from the sale may be exempt if the seller uses the proceeds to address their housing needs.

Conditions for Exemption

To qualify for this exemption, the seller must demonstrate that he used all of the proceeds from the sale to purchase a home for himselve, rather than just using part of the funds after deducting expenses.

The following expenditures are considered valid for meeting housing needs:

• Construction or Remodeling: Building a new home or renovating an existing one.
• Acquisition of Land: Purchasing land for residential purposes.
• Purchase of Real Estate: Buying another property.
• Return of a Deposit: Refunds to legal entities related to housing.
• Maintenance and Reconstruction: Upkeep or major repairs on a property.
• Settlement of Property Relations: Resolving property disputes.
• Payment for Shares in a Corporation: Investing in real estate-related shares.
• Loan Repayment: Paying off loans used for housing.

According to the Income Tax Act, if the exemption is contingent upon using the funds for housing needs, this condition is satisfied if the taxpayer uses these funds within the tax period following the sale. In simpler terms, if a taxpayer sells real estate in 2024, they can benefit from this exemption if they spend the proceeds on housing in 2023, 2024, or 2025.

Violation of the Conditions for Exemption and Receipt of Income

If the conditions for exemption are not met—particularly in cases where a conditional exemption applies to the sale of real estate with subsequent use of the tax benefit for housing needs—the taxpayer will be required to pay tax on the income received.

According to the Income Tax Act, “this income is classified as income under § 10 in the tax period immediately following the tax period in which the taxpayer received these funds, unless the conditions for exemption, which require using the funds for acquiring one’s own housing, are met.“

In practical terms, if you conditionally exempt income from the sale of real estate in 2024 but do not use the proceeds to meet your housing needs by the end of the 2025 tax period, you will need to report and pay tax on this conditionally exempt income in your 2025 tax return.

Contact the 360WEDO team for expert advice on taxation in the Czech Republic. We are here to help you understand your tax obligations and ensure that your payments are made on time, helping you avoid any potential penalties.

https://www.podnikatel.cz/clanky/kdy-se-vyhneme-platbe-dane-z-prijmu-pri-prodeji-nemovitosti