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ABOLITION OF 4% ACQUISITION TAX – WHAT YOU SHOULD KNOW AS THE OWNER OR PROSPECTIVE BUYER OF CZECH REAL ESTATE
Long discussed change in Czech tax law connected to real estate was finally approved – abolition of 4% acquisition tax. This article contains information you should know about this topic as the owner or prospective buyer of the Czech property.
EVOLUTION OF CZECH REAL ESTATE TAX
This tax has been considered as a controversial since its adoption in 2014. Perhaps that is also why it has undergone dynamic development in recent years and was cancelled eventually. Firstly, we briefly summarize how this tax evolved.
Until the end of 2013, the tax was 3% of the value of the transferred real estate. Until 2014, it was paid by the seller (transferor of property), who received money for the sale and the buyer (acquirer) was only in the role of guarantor. The only exceptions were sales at auctions, insolvencies or other sales based on the court (or executor) decision where the real estate transfer tax was paid by the buyer.
From 1 January 2014, the real estate transfer tax was renamed to real estate acquisition tax. Tax law gave a possibility for contractual parties to decide that the buyer will be the taxpayer even in a standard sale. However, this was only the case if the seller and the buyer expressly agreed on this fact in the purchase contract. If the taxpayer was the seller, the buyer remained the guarantor.
Finally, from 1 November 2016, the buyer become the taxpayer in all types of real estate sales and the amount of tax remained four percent of the value of the transferred real estate. The institute of guarantee by the other party was abolished. This additional purchase costs of 4% had significant impact on buyers’ finances at that time, especially in bigger real estate transactions. Years 2016-2019 were years of Czech real estate prices explosive growth. Therefore, buyers had no choice but accept their new tax duty as another additional purchase cost.
NEW LEGISLATION IN 2020
Everything changed in September 2020 because 4% acquisition tax has been cancelled after long discussions in Czech parliament about final form of this new legislation. Additional information needs to be provided, as several other important changes in real estate tax laws are related to new legislation.
Firstly, the law has uncommonly a so-called retroactive effect (means that it regulates also past events). The tax abolition applies to all taxpayers whose tax is due by or after 31 March 2020. This group also includes all real estate purchases for which the registration of the ownership right in the Real Estate Cadasters was made from 01.12.2019 onwards. Even if you already have the tax due, you do not have to file a tax return.
The new law package contains also other fundamental changes – the period for income tax exemption in case of resale of real estate will be 10 years from 2021 (now it is only 5 years). For example, if you purchase a flat in 2021 and sell it again before 2031, you will have income tax duty from this sale (note: income tax base in this case is counted from difference between your purchase and sale price).
WILL CZECH REAL ESTATE PRICES REACT TO THE ABOLITION OF ACQUISITION TAX?
“It is clear that buyers now will be able to buy much better, which will be noticeable especially in sales of more expensive apartments or houses”, says real estate agent Jan Griger from RE/MAX franchise. “For example, at a price of CZK 10,000,000, buyer would have to pay the 4% tax in amount CZK 400,000. Now instead, the buyer will be able to buy, for example, a new kitchen unit or perfect equipment for the apartment.”
It is important to remember that the abolition of 4% tax is not directly affecting prices of apartments in new residential projects because the first sale of a new flat in new project or house was always exempted from this acquisition tax. This tax was also not paid in cases of the transfer of cooperative apartments.
We assume that buyers can now benefit from a combination of two benefits in case they purchase real estate until the end of this year as:
- For real estate acquired before the end of 2020, the income tax exemption period remains still only 5 years (10 years will apply to real estate acquired from 1.1.2021 onwards),
- The obligation to pay real estate acquisition tax was cancelled as we described above.
