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Proposal to abolish a real estate acquisition taxes and related measures

The Ministry of Finance proposes adopting a series of tax measures in the area of real property, from which it hopes to set the market in motion and, in the long term, also improve the availability of one’s own housing. A key part of the proposal is a complete abolition of the 4% real estate acquisition tax currently paid by the buyer at the time of acquisition of a property (unless the acquisition is exempt as, for example, in the first transfer for consideration). The impact on the state budget in abolishing the real estate acquisition tax is to be compensated by the abolition of the deduction of interest on residential mortgage loans from the personal income tax base (currently up to CZK 300,000 per annum).

That cancellation should not apply to loans granted before 1 January 2021 (with some exceptions). According to the Finance Minister Alena Schillerová “the buyers will be left with more money than before and, above all, they will have it now, not only in twenty or thirty years after the mortgage has been paid.” (Retrieved from the Press Release of the MF) Over a long period of time, the fiscal impact of both the above changes is more or less zero for both taxpayers and the state budget. In addition, according to the Ministry, the current system is disadvantageous to those taxpayers who acquired real estate from their own funds.

However, the above-mentioned reasoning ignores a little the fact that the first transfers for consideration of the real property intended for housing (i.e. in particular flats and family houses), i.e. “first sales” are currently exempt from the real estate acquisition tax. In the relevant situation, this means that taxpayers who buy housing as part of the first sale, are disadvantaged by the proposed change because they lose only the tax deduction, but there are no savings from the abolition of the real estate acquisition tax. Since in Prague alone more than a third of the apartments sold are first sales, it can be said that about a third of the taxpayers are directly affected by this change.

Furthermore, the abovementioned proposal also includes an extension of the period for exempting natural persons’ income from the sale of real property from the current five to 15 years; if this income is used to procure housing, the exemption should be maintained. Here comes another question, namely what the term ‘procuring’ really means. In the current wording, the expression ‘satisfaction’ is used, which includes, for example, the payment of the mortgage on the apartment in which the taxpayer resides. The question is whether a similar interpretation can be adopted for the term ‘procuring’.

According to the proposal, all profits from the sale of real property within a shorter 15-year period are thus subject to a 15% income tax. Since this effect is not compensated in any way in the proposal for the benefit of the taxpayers, the result is a negative impact on the taxpayers in favour of the state budget. The extension of the deadline was originally intended to be part of the 2021 tax package, but the Ministry of Finance decided to include it already in the current proposal.

From the point of view of the practical implications of the proposal, we would like to point out that the adoption of the proposed measures may not in itself lead to an improvement in the availability of own housing advised by the Ministry. In the future, it may thus happen that the aforementioned extension of the period for the application of the exemption will lead to an increase in the price of real estate or ‘freezing’ of sales for a minimum of 15 years in order to benefit from the exemption.

If the proposal is adopted in the future, the Ministry of Finance expects its retroactive effect. The taxpayers whose acquisition tax is due from 31 March 2020, i.e. a record in the Land Register occurred in December 2019 and beyond, have the possibility to choose whether they will pay the acquisition tax and be able to claim the interest deduction and the seller will have the income exempt if he owns the property for more than 5 years, or they will not pay the acquisition tax and will not be able to claim the interest deduction. However, the seller will thus lose the possibility of exemption. How the agreement and, in particular, control by the tax administrator will take place, is not apparent at this time, as the buyer chooses the option and the seller will have to proceed accordingly. But that is not a very practical solution.

Furthermore, the proposed amendment lacks a fairly important transitional provision applicable to taxpayers who, at this point in time, meet the 5-year time test, but no longer meet the 15-year period proposed in the planned amendment for 2021. However, the provision to which this transitional provision applies is excluded from the 2021 amendment and is inserted into the current one.

We will keep you informed of the status of the proposal and any potential changes thereto.

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