In today’s post, I’ve prepared a guide for you on how to properly tax rental income from properties to your advantage, and how to deal with property depreciation in the Czech Republic. Let’s get into it.
Property rental has its own taxation rules in Czech legislation, specifically in the Income Tax Act under § 9 (Section 9), and it is reported in your tax return through an attachment to the income tax return as stipulated in Section 9.
What are the methods of taxation?
In Czech law, we can calculate the tax base for rental income in two ways:
- either we offset actual expenses against the income,
- or, we use so-called flat-rate expenses, at a rate of 30 percent of the income.
When it comes to the methods of taxation, there are two ways to calculate the tax base for rental income as per the law:
Actual expenses: These are the expenses that the taxpayer can prove they actually incurred and that are directly linked to the taxable income they earned. Opting for actual expenses, however, involves a more detailed and labor-intensive approach to tax calculation. The lessor needs to be capable of providing evidence to the tax office about the specific expenses incurred, demonstrating what the money was spent on, verifying the actual payment, and establishing the expense’s connection to rental income.
Flat-Rate expenses: These are determined as a percentage of income – 30 percent for rental income – and are considered to cover all the actual expenses of the taxpayer. The Income Tax Act sets a maximum limit for flat-rate expenses at 600,000 crowns, which corresponds to an income of 2 million crowns. The lessor cannot claim deductions exceeding this limit against their income. Any income above this threshold is subject to full taxation. This method of determining the tax base is simpler, requiring only the recording of income without detailing expenses.
In most scenarios, opting for actual expenses tends to result in a lower tax payment compared to using the flat-rate expenses, which is mainly advantageous due to its simplicity.
From a tax perspective, flat-rate expenses make sense for lessors only when the tax depreciation of the property cannot be applied to the expenses, or when these depreciations are exceptionally low. This situation arises, for example, when renting a cooperative apartment where tax depreciation isn’t applicable, or with other properties that are excluded from depreciation (such as those acquired as gifts with exemption).
How we apply actual expenses
First, we need to perform a few basic calculations:
Rental income
In taxable rental income, we include only net rent without related services associated with their use. These are mainly deposits for services (for heating, for the supply of hot water, cleaning of common areas in the building, use of the elevator, water supply, drainage of waste water through sewers, lighting of common areas in the house, inspection and cleaning of chimneys, waste removal, etc.). You should note that we do not include advances and deposits from tenants as income.
Actual expenses
We can claim the following expenses against rental income:
- annual real estate depreciation – most often straight-line depreciation for 30 years, the first year at 1.4% of the purchase price, subsequent years at 3.4%.
- interest on the mortgage we took out to purchase the property, only for the rental period.
- fees for maintaining a mortgage loan account, only for the rental period.
- commission to the real estate agent for not finding a tenant.
- the costs of interior equipment of the property, such as furniture, appliances, etc., if they do not exceed the amount of CZK 80,000 individually.
- the costs of the internal equipment of the property, such as furniture, appliances, etc., if they exceed the amount of CZK 80,000 individually, must be written off.
- the cost of repairs and maintenance, including all materials used, does not have a limit, but equipment must be restored to its original condition (i.e., not a valuation).
- more extensive construction work with a value exceeding CZK 80,000 must be depreciated – up to CZK 80,000 can be included in the expenses of the given year.
- contributions to the repair fund for apartments.
- Management fee.
- remuneration of the building’s cooperative committee (SVJ).
- Property insurance.
- Property tax paid.
- lump sum expenditure on transport by motor vehicle, if we own it (if the vehicle is also used privately, then this is CZK 4,000 per month, otherwise it is CZK 5,000 per month).
- Preparation of a tax return by a tax advisor, etc.
Real estate depreciation
The Czech Income Tax Act gives you a choice between two methods of depreciation – accelerated and straight-line. Whichever method you choose, you depreciate for the same amount of time, but if you choose the accelerated form, the purchase price is depreciated faster in the first years. Straight-line depreciation remains the same except for the first year of depreciation.
To keep things simple, we will only take into account straight-line depreciation in this following example.
| Depreciation group | In the first year of depreciation | Depreciation in subsequent years | For increased entry price |
| 3 – buildings and apartments in buildings made of wood and plastic | 5.5 % | 10.5 % | 10 % |
| 4 – hotels and historical or cultural monuments | 2.15 % | 5.15 % | 5.0 % |
| 5 – Other apartments and apartment buildings | 1.4 % | 3.4 % | 3.4 % |
Most of the properties are in depreciation group 5 in the above example, i.e., 1.4% of the acquisition price of the property can be applied in the first year of depreciation, and 3.4% in the following years.
Depreciation cannot be applied in the Czech Republic to sublease cooperative real estate or similar forms of ownership (such as a share in limited liability companies [s.r.o.], condominiums, etc.).
Purchase Price
In the case of purchased real estate, this will include the purchase price in addition to associated acquisition expenses. This can include, for example, real estate acquisition tax, real estate agent commissions, legal fees, significant building modifications exceeding 40,000 crowns in value, built-in furnishings, and furnishings valued over 40,000 crowns.
In the case of an inherited property or a property bought more than five years prior to the start of the lease, the reference will be the so-called replacement price. This is the price at which the property could have been acquired at the beginning of the lease, and an expert assessment is usually obtained to establish this value. In situations where an inherited property was already being rented out and has been subject to depreciation, the existing depreciation scheme is applied, meaning that a fresh expert assessment isn’t needed.
In cases where real estate has been acquired as a tax-exempt gift, depreciation isn’t applicable.
Keeping records
If you’re a landlord and you’re deducting actual expenses from your rental income, it’s important to stay organized. This means you need to keep a record of all your expenses, noting when you spent the money, what it was for, and how much you paid. Make sure to hold onto all the receipts and proof of payments as well. You’ll also need to keep track of any assets that have depreciated over time, like appliances or furniture, and keep records of any repairs you’ve set money aside for. And don’t forget to keep a record of any money you’re owed or owe to others. Keeping things organised and clear will save you a lot of hassle when it comes to taxes.
It’s a good idea to keep these records in an Excel spreadsheet, for example, so that you have everything in one place. I would also recommend that you convert all your documents into electronic form in case they go missing or start to degrade over time (e.g., paper receipts fade over time and can become unreadable).
Completing your return in 5 steps
- First, we calculate the rent you received during the year. This amount goes in line 201 of the tax return‘s appendix.
- Next, we calculate how much the property cost you to buy.
- Then, we calculate how much the property’s value has depreciated over time.
- We also add up any costs related to renting out the property and its depreciation. This sum is entered in line 202 of the tax return’s appendix.
- After that, we find the difference between the amounts in lines 201 and 202. We write this difference in lines 203 and 206, and then in line 39 on your income tax return. This amount is subject to a 15% tax rate. Keep in mind that for long-term rentals, social and health benefits are not deducted.
Tip: In the Czech Republic, if a loss has been incurred, the period for which the tax office can check back is extended up to 8 years. So, for example, if we incur a loss when applying all expense items, it is better to not include some expenses – that is, to postpone the depreciation for a year. The period for inspection then only goes back 3 years.
When applying a flat rate or lump sum
In this case there is no need for records, calculation of depreciation, purchase price, etc. We simply need to add up the rent for the given year.
Your final steps to complete the return
- In the appendix to the tax return, tick “I claim expenses as a percentage of income”.
- Add up the rent earned in the given year and enter this value in line 201 in the appendix.
- Calculate 30% of the total rent amount and write this in line 202.
- Calculate the difference between lines 201 and 202, enter this difference in lines 203 and 206 of the appendix, and then also in line 39 of the income tax return. This amount is subject to taxation at the rate of 15%. Remember, social and health benefits are not deducted for long-term rentals.
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