Is acquisition of real estate fiscally neutral?
Given the current inflation rate and the Monetary Policy Council keeping interest rates at a low level, the prices of real estate have risen considerably. Virtually all players engaged in the economic life: be it individuals seeking to satisfy their housing needs, businesses trading in real estate or investors taking away their capital from financial institutions seeking to protect it against the adverse effects of inflation, are bound to encounter the fiscal aspects involved in each stage of real estate possession process: its acquisition, use and ultimately sale.
Purchasing real estate is in principle fiscally neutral to the purchaser. It may entail expenses for its acquisition, whether out of one’s own savings or through external financing in the form of a loan. Real estate may be acquired free of charge, i.e. by way of donation or inheritance. The fiscal aspects of real estate acquisition will vary for the taxpayer depending on the entity selling the real estate, its destination and form of acquisition.
Individual purchaser – own housing purposes
An acquisition of real estate by an individual for his/her own housing purposes is neutral from the PIT perspective. What will be of importance in the future is, however, a proper documentation of the expenses incurred in purchasing the real estate, as such expenses will be tax deductible costs at the moment of potential sale of the real estate before the lapse of 5 years from the date the real estate was acquired. Tax deductible costs will include all documented costs of acquisition or generation of an asset. These include all expenses incurred by the seller (former acquirer) necessary and required for the real estate to be validly disposed of. Moreover, a causal link must exist between such expenses and such sale for consideration. The expenses should be documented with invoices or other documents (e.g. administrative documents where administrative fees have been paid).
The purchase price will be documented with a notarial deed or invoice (if the sale was not exempt from VAT) and a confirmation of a bank transfer of the sale price into the seller’s bank account, or other documents in the case of a cash payment. Problems may occur in the event of real estate purchased through inheritance, i.e. free of charge. In this case, the costs of purchase will include the amount of inheritance and gift tax paid as well as documented costs of acquisition or generation of the real estate by the decedent and any charges against inheritable estate which are attributable to the tax payer (e.g. debts against the inheritable estate, legitimate portion, legacies and instructions carried out). On the other hand, in the event of estate division and the acquirer paying of the other heirs, such repayment will also constitute a cost upon sale of the real estate (private tax ruling of 17.02.2020, file no. 0113-KDIPT2. 2-4011.533.2020.1.KK). The expenses incurred in paying of the other heirs (co-owners) must also be documented by the purchaser.
A purchaser who does not carry on business will bear the ultimate cost of VAT, if the sale of the real estate was taxable with VAT. The VAT rates vary with the intended use of the real estate in question, i.e. 8% in the case of residential use and 23% for commercial purposes.
Real estate purchaser – a business
A purchase of real estate by a business (whether sole trader, partnership or company) is also fiscally neutral, i.e. it does not generate any tax implications at the moment of purchase. Depending on the needs of the business, the real estate purchased can be recorded in the books as: (1) a commodity (for resale), (2) a fixed asset (where the intended term of use exceeds 12 months) or (3) an asset (where the intended term of use does not exceed 12 months).
If the real estate is qualified as a fixed asset, it must be recorded in the fixed and intangible asset register.
A sole trader or partner having joint marital ownership will be co-owner of the real estate together with the other spouse.
A purchaser being a business will be eligible for deducting the input VAT (paid) when purchasing the real estate only if the purchase of the real estate involves VAT. In that event, the input VAT (i.e. the VAT on the purchase of real estate) will be subject to: (1) deduction in the current accounting period or in subsequent accounting periods if it is higher than the output VAT on the sales of the business, or (2) be refunded at the business’s request.
Whether the person acquiring real estate is an individual not engaged in business or a business entity, acquisition of real estate entails payment of certain other taxes.
PCC (transaction tax)
If the sale of real estate is exempt from VAT, the purchaser will pay the transaction tax at 2% of the purchase price of the real estate. Transaction tax is collected by the notary executing the notarial deed of sale of real estate.
Real estate tax, agricultural tax and forest tax
Upon acquisition of real estate, obligations with respect to real estate tax, agricultural or forest tax will arise (depending on the classification of the real estate in the land and building records). The purchaser ought to bear in mind that these taxes will be due starting from the month following the month in which the acquisition took place.
In the case of individuals (including sole traders), a purchaser is required to file, within 14 days of the date of acquisition of real estate, a special form containing details of the real estate and building structures thereon, if any. Based on this information, the municipal authority (i.e. the mayor) will issue a decision determining the level of tax to be paid in proportion to the time the real estate is held within the following deadlines: by 15 March, 15 May, 15 September and 15 November of a fiscal year.
Other businesses that are not individuals file a real estate return by the end of January of each fiscal year, or within 14 days of the date of real estate acquisition if the acquisition took place in February or later month. The amount of tax disclosed in the return is payable in 12 instalments: the first instalment being payable by the end of January, with the remaining instalments being payable by the 15 day of each following month.
The following are taxable with real estate tax: land and buildings, and those non-building structures with are related to a business activity. Land and buildings are taxable on their area at a tax rate adopted by the relevant municipal council. As regards non-building structures, the tax is calculated as 2% on the initial value of the asset adopted for the purposes of PIT or CIT. In order to properly ascertain the amount of tax it is thus necessary to properly qualify the subject of taxation as well as the taxable base for real estate tax.
Forest and agricultural land, purchased for purposes other than farming or forestry (particularly for resale purposes) will also be subject to real estate tax rather than agricultural or forest tax.
Taxable with forest tax are forests used for forestry purposes. The tax is determined based on the area of the forest (in hectares) and an indicator determined on the basis of average price of wood sold. Agricultural tax, on the other hand, is calculated as follows: (1) in the event of farms, based on the number of comparative fiscal hectares, and (2) for other land – according to the number of hectares set out in the land and building records.
It is essential to properly qualify real estate for property tax purposes in order to properly establish the level of liability due in terms of real estate, agricultural or forest tax.
Gratuitous acquisition, i.e. inheritance and donation
Real estate can be acquired without consideration by way of: inheritance or gift, or as a result of adverse possession.
In such cases, the acquirer should bear in mind the following:
- exemption applies to: spouses, children, parents, step children, siblings, step father and mother, by reporting the acquisition of real estate with the relevant tax office (unless acquisition is made in the form of notarial deed – as in the case of donation);
- such notification must be filed within 6 months of the date of: the court order declaring the acquisition of inheritable estate or order declaring adverse possession becoming final.
- where an exemption does not apply – a proper tax group must be established, and a declaration for the purposes of establishing the amount of inheritance and gift tax due and the tax paid.
Dorota Dąbrowska, Tax Advisor, ATA Tax Sp. z o.o.
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