How to Report the Sale of Real Estate in Your Tax Return

When an individual sells real estate, they may be required to pay tax on the income received – but this obligation doesn’t always apply. So, in which cases is the sale of real estate taxable, and where should the income be reported in the tax return?

Since real estate sales are not everyday transactions, they often involve substantial income, and potentially, a tax obligation. However, not all income from the sale of real estate is subject to taxation.

In this article, we’ll explain the specific cases where such income may be exempt from tax, and when it must be reported and taxed under Section 10 of the Income Tax Act.

Exemption Based on Ownership Period (Time Test)

One of the most common ways to exempt income from the sale of real estate is by meeting the so-called “time test.” If an individual has owned the property for at least 10 years, the income from its sale is exempt from income tax.

Important: A shorter 5-year period still applies to properties acquired before December 31, 2020. The 10-year rule applies only to properties acquired from January 1, 2021, onward.

The ownership period is counted from the date the individual legally acquired ownership, and it applies regardless of whether the owner lived in the property or not.

There’s a special rule for inherited property:

If the property was inherited from a direct relative or a spouse, the time the deceased person owned the property can be included in the ownership period.

Note: Different rules apply if the property was used as a business asset – the exemption may not be available in that case.

Tax Exemption for Personal Residence

If the ownership time requirement is not met, there is another way to qualify for a tax exemption – based on residence in the property.

If the seller lived in the property for at least two years immediately before the sale, the income from the sale may be exempt from income tax.

In this case, the burden of proof is on the taxpayer. To demonstrate actual residence, the following can be used as evidence:

• Statements from neighbors
  
• Receiving mail at the property
  
• Utility usage records
  
• Proximity to place of employment, etc.

Even if the individual lived in the property for less than two years, the income may still be exempt – but only if the proceeds from the sale are used to meet the taxpayer’s own housing needs (e.g., buying a new home).

Exemption When Using Income for Housing Purposes

If the income from the sale of real estate cannot be exempted based on the ownership period or residence requirement, there is still another option available: the exemption can apply if the seller uses the proceeds to meet their own housing needs.

According to the Income Tax Act, housing needs include, for example, the purchase of a house or apartment, construction or renovation of a property, repayment of a mortgage loan, or other similar housing-related expenses. It is essential that the income is used strictly to cover the seller’s own housing needs.

The law also specifies the timeframe during which the proceeds must be used. The taxpayer must either use the funds to meet their housing needs by the end of the tax year immediately following the year in which the income was received, or they must have used an amount corresponding to the proceeds to meet housing needs in the tax year immediately preceding the year of sale.

It’s important to note that the entire amount of the sale proceeds must be used, not just the difference between the income and the original expense. So, for example, if the property is sold in 2025, the condition will be considered fulfilled if the proceeds are used for housing purposes in 2024, 2025, or 2026.

When Tax Will Have to Be Paid

If the income from the sale of real estate does not qualify for exemption under any of the conditions described above, it must be taxed as so-called “miscellaneous income” under Section 10 of the Income Tax Act.

In this case, the taxable amount is calculated as the difference between the income from the sale and the expenses related to that sale. If the expenses exceed the income, they are treated as equal to the income, meaning that no taxable income arises – but the resulting loss cannot be deducted as a tax loss. The final taxable amount is subject to a personal income tax rate of 15%, though under certain conditions, a higher rate of 23% may apply.

Section 10(1)(b) of the Income Tax Act defines miscellaneous income as income received in exchange for the transfer of real estate. However, the seller can deduct the purchase price of the property as an expense. If the property was acquired free of charge, the expense is determined based on the value set under special property valuation legislation on the date of acquisition.

If the property was part of the seller’s business assets or generated income from rent, the depreciated value of the property may be included as an expense.

Additional deductible expenses may include costs for improvements, repairs, and maintenance, as well as other costs directly related to the sale: such as the commission paid to a real estate agent.

However, personal expenses or unpaid work, such as DIY repairs made by the seller, cannot be included as tax-deductible expenses.

For personalized advice on your tax situation or to discuss how the sale of real estate affects your tax obligations, contact the specialists at 360WEDO. Simply submit the form on our website, and we will reach out to provide tailored guidance on your taxes, business, and accounting needs in the Czech Republic.

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