There are a number of income tax exemptions available in the Czech Republic on the sale of property (see our article Property Sales Tax). One of them concerns the case when you use the money from the sale to buy another property, for example, when you reinvest the money from the sale of one property into another. But how does this work in practice?
First of all, it is important to know whether the seller acquired the sold property before 31 December 2020 or after 1 January 2021 inclusive. While for the former option, the seller can only claim the income tax exemption for properties sold in which he/she himself/herself has lived and which are also directly intended for this purpose (i.e. only an apartment or a family house), for properties acquired in 2021 and onwards, the exemption can be used for all properties sold (i.e. also for cottages, land, commercial buildings, etc.) – without the condition that the seller himself/herself has lived there. We would like to add that the date of the proposal for the registration of the ownership right at the relevant land registry, not the actual execution of the transfer at the land registry, is crucial for determining whether you fall into one or the other group. This means that if the proposal for registration was, for example, on 20 December 2020, but the property was not transferred until 5 January 2021, the property falls into the first group.
What can be bought with the money from the sale
In order to be exempt from income tax in the Czech Republic, you must use the money to buy a property that will “satisfy your own housing needs”.
According to Czech legislation, own housing needs means all of the following:
- (a) the construction of an apartment building, a family house, a unit that does not include non-residential space other than a garage, cellar or storage room, or the alteration of a building,
- (b) the purchase of land provided that the construction of the housing need referred to in (a) is commenced thereon within 4 years from the time of conclusion of the loan agreement, or the purchase of land in connection with the acquisition of the housing need referred to in (c)
- (c) purchase:
- a residential building,
- a family house,
- an apartment building or a family house under construction,
- a unit which does not include non-residential space other than a garage, cellar or storage room,
- (d) the repayment of a deposit to a legal person by a member thereof for the purpose of acquiring the right to rent or otherwise use an apartment or family house,
- (e) the maintenance and alteration of the construction of a dwelling house, a family house, a rented or occupied flat or a unit which does not include non-residential space other than a garage, cellar or storage room,
- (f) the settlement of the community of property of spouses or the settlement of co-heirs where the subject of the settlement is the payment of the share associated with the acquisition of a unit which does not include a non-residential space other than a garage, cellar or storage room, a family house or an apartment building,
- (g) consideration for the transfer of a share in a business corporation by a member thereof made in connection with the transfer of the right to rent or otherwise use a dwelling,
- (h) the repayment of a loan or borrowing used by the taxpayer to finance the housing needs referred to in (a) to (g), if the conditions for those housing needs are met.
Where time is of the essence
In order to qualify for the income tax exemption in the Czech Republic on the sale of property to satisfy one’s own housing need, the satisfaction of that need must occur either in the calendar year following the collection of the sale proceeds or in the calendar year preceding the collection of the sale proceeds. To give you an idea – if you sold a home in 2022 and the sale proceeds were credited to your account on June 20, 2022, then you can use the sale proceeds to buy another property before December 31, 2023, or you can show that you bought another property for a similar amount in the period after January 1, 2021.
You must also notify the relevant tax office by the deadline for filing the tax return for the period in which the income was received (so if the proceeds were collected in 2022, you must notify by 1 April 2023).
What does this mean in practice?
However, not to dwell on theory, we offer an illustrative example of how the income tax exemption works if you use the proceeds to meet your own housing needs:
Example 1
In 2021, you sold the flat you lived in yourself for 10,000,000. You bought this flat in 2020.
In 2022 you bought another flat for 15 000 000 CZK. This means that the purchase price of the new apartment is higher than the sale price of the previous apartment. So you used the entire amount from the sale of the previous apartment to buy the new apartment, plus you had to pay the extra CZK 5 000 000. In this case, you are 100% exempt from income tax on the sale of the previous apartment.
But what would happen if you bought a cheaper property than the previous one sold? This is shown by another example.
Example 2
In 2021, you sold the flat you lived in for 10 000 000. You bought this apartment in 2020.
In 2022, you bought another flat for 7 000 000 CZK. The purchase price of the new apartment is therefore lower than the sale price of the previous apartment. This means that you used only part of the money from the sale of the previous flat to buy the new flat. In this case, you will only be partially exempt from income tax. It will be essential to calculate the profit you made on the sale of the previous flat.
You bought the previous flat in 2020 for CZK 8,000,000 and so made CZK 2,000,000 on the sale.
You only invested CZK 7 000 000 of the total sale price of the previous apartment, which was CZK 10 000 000, in the purchase of the new apartment. You therefore invested 70% of the total selling price of the previous apartment.
You will be exempt from income tax on 70% and will only be taxed on the remainder, which is 30%.
30% of the profit of CZK 2 000 000 is CZK 600 000, income tax is 15%, so the tax will be CZK 90 000.
Are you selling a property and want to get rid of the worries associated with this transaction? Put the sale in the hands of our experienced real estate brokers. At Kotula Real Estate Agency, we will guide you through the entire process and make sure you get the maximum possible amount for your property. Contact us!
Photo: Syda Productions via Canva.com
