Although the Income Tax Act deals with the taxation of gains from the transfer of property more broadly, the present overview is given of the income tax payable on gains or income derived from the following transactions:
- gains from transfer of immovable or movable property (sale or swap)
- income derived from intermediation of immovable property
- income from transfer or intermediation of real estate reservations
Accordingly, the term “property” for the purpose of this guide refers primarily to immovable property (e.g. land, building, apartment), but also movable property (e.g. timber).
- Immovable is a delimited part of surface of the earth or a plot of land, the essential parts of which are permanently attached things (structures, growing forest, other plants, unharvested crop), which together with the land form a separate registered immovable.
- A movable is a thing that is not immovable.
Although, as a rule, gains from transfer of property are subject to taxation, there are still some exceptions in respect of which the transactions related to the transfer or acquisition of property are exempt from tax. More information can be found in "Transactions of transfer of property exempt from tax".
Calculation and declaration of taxable gains
Before charging income tax, a taxpayer has the right to deduct from the income received upon sale or exchange of property the certified expenses directly related to the acquisition or transfer of property. In the absence of documentary evidence, the expenses made are not taken into account in taxation.
The gains or loss from transfer of property mean:
- in the case of sale – the difference between the sales price and the acquisition cost of the property minus expenses directly related to the sale of the property
- in the case of exchange – the difference between the market price (average local price) of the property received as a result of exchange and the acquisition cost of the property minus expenses directly related to the exchange of property
The acquisition cost of property means:
- the expenses made for the acquisition of property (e.g. purchase price)
- the expenses made for improving (e.g. renewal of a house) and additions (e.g. extension of a building)
- commissions and fees paid upon the acquisition of property (e.g. notary fees, state fee and other fees related to the contract paid by a purchaser)
- in the case of property acquired by financial lease (leasing), the total amount of lease or down payments actually paid, excluding interest
- in the case of a self-manufactured thing, the total amount of expenses incurred in manufacturing the object (e.g. construction costs of a building)
- the amount added to business income, if a person transfers the property which has been previously taxed as the property taken into personal consumption by a sole proprietor
Expenses directly related to transfer of property are:
- expenses inevitable for concluding a transaction related to the transfer of property (e.g. a notary fee paid by the seller, state fee and other payments related to the contract)
- expenses for the purpose of making the transaction more successful (e.g. a broker's fee, property valuation fee)
- in the case of the transfer of the right to cut standing crop and felled timber, the expenses relating to forest management
- in the case of the sale of timber, service fees paid for logging and transportation of timber
Both the acquisition costs and the transfer costs must be supported by documentary evidence.
It is not possible to deduct from gains the overhead costs related to the management of property (e.g. the costs of maintaining the transferable apartment – papering, painting, utility costs, electricity bills, etc.).
A person acquired an apartment for 625 864 kroons (the acquisition cost) and sells it for 60 000 euros (the sales price). The apartment was not used as a residence. The expenses directly related to the sale (property valuation, expenses related to the sales contract, etc.) were about 3000 euros, which may be deducted from the income. However, the maintenance expenses made before the sale of the apartment in the total amount of 500 euros are not subject to deduction, irrespective of the fact that there are documents to certify the expenses made. In the income tax return, the acquisition cost must be converted into euros at the current exchange rate: 625 864 ÷ 15,6466 = 40 000.
The gain from the sale of the apartment subject to income tax is calculated as follows: 60 000–40 000–3000=17 000 eurot.
Income tax rate is 20%, the amount of income tax is calculated as follows: 17 000 x 0,20=3400 eurot.
The formula for calculating the taxable gain derived from the sale of property is as follows:
SALES PRICE – ACQUISITION COST – EXPENSES DIRECTLY RELATED TO THE SALE = GAIN SUBJECT TO INCOME TAX
Years ago, a person acquired a two-room apartment for the acquisition cost of 55 000 euros (converted into euros), which he did not use as a residence, but hired it out. Now the person makes an exchange transaction to swap a two-room apartment for a three-room one. The market price of both apartments at the time of swapping is 90 000 euros. The expenses related to the exchange contract including a state fee and notary fee make up 340 euros.
The gain subject to income tax from the swapping of the apartments is: 90 000 – 55 000 – 340 = 34 660 euros. As a result of the swapping the person received 34 660 euros of taxable income.
In this example, it should be kept in mind that the provisions applicable to sales transactions are also applied to exchange transactions, and both parties of the contract are the sellers and the purchasers at the same time. In general, the prices of exchanged things are equivalent.
The formula for calculating taxable gain derived from swapping is as follows:
MARKET PRICE OF THE PROPERTY RECEIVED THROUGH SWAPPING – ACQUISITION COST OF THE PROPERTY SWAPPED – EXPENSES DIRECTLY RELATED TO SWAPPING = GAIN SUBJECT TO INCOME TAX
In the case of the sale of property, the gains derived from the transfer of property shall be taxable in the period of taxation (in a calendar year) when money from the sales transaction is received. In the case of swapping, the gains are created in the period of taxation when a corresponding entry is made in the land register.
Income from transfer of property is declared on the income tax return for a resident natural person (form A), which must be submitted to the Tax and Customs Board not later than by 30 April of the year following the receipt of income. The most convenient way of submitting a tax return is to file it in the online services environment e-MTA.
The income tax amount indicated in the tax notice must be paid to the bank account of the Estonian Tax and Customs Board no later than by 1 October of the year of submission of the tax return.
If money is received by the seller of the property in several taxable periods, the acquisition cost and the costs directly related to the sale are taken into account in the calculation of the gains derived in different periods according to the proportion of money received during that taxable period.
At the taxpayer’s request, it is also possible to take into account the acquisition cost and costs related to the sale to the extent of the money received during the taxable period, i.e. the gain is taxed if the income exceeds the cost of the acquisition and the costs related to the transfer.
If the transfer of property is a taxable transaction, but during the taxable period no gain is derived when taking account of the acquisition cost, such a transaction must still be declared in order to take into account the cost of the acquisition.
Income from the intermediation of immovable property is generally declared and taxed as business income of a natural person. If the intermediation of immovable property is the business of a natural person, the income received must be declared on the business income declaration (form E). A sole proprietor entered in the Commercial Register can deduct business-related expenses from income. Both income and social tax are payable on business income.
If the intermediation of immovable property is not a business activity, the income received is declared on the income tax return Form A. Income tax is paid on the income (no social tax must be paid).
The income received from the transfer of real estate reservations or intermediation is taxable as business income (declared on Form E) or gains from the transfer of property (declared on Form A) or as other income (declared on Form A).
Tax-exempt transactions of transfer of property
Income tax is not charged on the gains derived from the transfer of property, if persons transfer the following types of immovable used by them as their place of residence until transfer:
- an immovable the essential part of which or the object of apartment ownership or a right of superficies is a dwelling , or
- a building or apartment as a movable, or
- an apartment in a residential building belonging to the housing association or building association.
The term “residence” is important here. Pursuant to subsection 14 (1) of the General Part of the Civil Code Act, the residence of a person is the place where he or she permanently or primarily lives.
The taxpayer’s place of residence is first characterised by its connection with his/her personal and economic interests. Therefore, the determination of a residence in each case of tax exemption is a matter of proving facts. According to the guidelines of the Supreme Court, the actual residence of a person is the determining factor in the implementation of tax exemptions.
If the transferable dwelling has been partly used for other purposes (e.g. rented out, used in business, etc.) until the transfer, the exemption is granted in proportion to the ratio of the surface area of the premises used as a residence and for other purposes.
Until the transfer, the sole proprietor used 70 % of its apartment with a total surface area of 100 m2 as a residence and 30 % for entrepreneurship. The acquisition and improvement costs of the dwelling are not deducted from business income.
The sales price of the apartment is 100 000 euros, the taxable part of which is 30% in the amount of 30 000. The acquisition cost is 70 000 euros, of which 30% i.e. the amount of 21 000 euros is taken into account. The expenses related to the transfer make up 10 000 euros, 30% of this amount, 3000 euros, is taken into account.
The gain to be declared is 30 000–21 000–3000=6000 euros.
Since the transfer of residence is exempt from income tax, the way the dwelling has been acquired – whether inherited, gifted, purchased, returned or privatised by pre-emption – is not relevant in the application of the exemption.
If two residences are sold within the period of less than two years, the first (earlier) transaction is exempt from tax and the second transaction is taxed. The two-year time between the transactions is considered to start from the next day of the date on which the transaction is entered in the land register.
In January 2018, the person sold his apartment, which he had been using as his residence. The notarial purchase and sale contract was signed on 23 January 2018. The entry in the land register was made on 26 January 2018.
The person also sold the residence in January 2020. The notarial purchase and sale contract was signed on 15 January 2020. The entry in the land register was made on 18 January 2020.
The period between the sale of the first and second residence is less than two years, so the sale of the second residence must be declared in the income tax return of 2020. In the case of this example, the two-year period starts on 27 January 2018.
If a loss arises from the sale of the second residence, such a transaction is not taken into account and does not have to be declared, but the documents of the transaction (concerning costs of acquisition and sale) must be kept for at least five years.
Dwelling with a storage room
For tax purposes, a transfer of dwelling is treated equally in the following cases:
- a dwelling together with a storage room and a parking space which belong to the dwelling, entered in the land register as one apartment ownership; or
- a dwelling together with a storage room (non-residential premises)and a parking space (non-residential premises) which belong to the dwelling, entered in the land register as independent apartment ownerships.
If a dwelling together with a storage room and parking space registered as independent apartment ownerships is transferred by one sales transaction, the transaction will be subject to tax exemption on the transfer of dwelling. With reference to the two-year-rule, it is considered as one sales transaction as well.
If a storage room or a parking space is transferred separately from a dwelling by another sales transaction (e.g. before or after the sale of the dwelling), or if the storage room or parking space was not used as a part of the dwelling but for commercial purposes (e.g. rented out or used for business), the sale will be subject to income tax.
Part of the legal share that belongs to the physical share of the apartment ownership
If a part of the legal share which belongs to the physical share of the apartment ownership is transferred (e.g. with the aim of increasing the physical share of an apartment ownership or creating a new apartment ownership), such an assignment for charge will be subject to taxation, because a legal share in a plot of land or parts and equipment of a building is not individually considered as a dwelling of a taxpayer.
The mentioned parts of apartment ownership do not belong to the physical part of apartment ownership (taxpayer’s dwelling), instead, these are legal shares of common ownership of the apartment house which belong to the physical share (subsection 1 (1) of the Apartment Ownership and Apartment Associations Act).
Holiday apartment/visitor’s apartment located in business premises or on a commercial land
Visitor’s apartment means an accommodation establishment that is rented out entirely (subsection 18 (8) of the Tourism Act). A visitor’s apartment/holiday apartment is used for commercial purposes and therefore it is not exempt from income tax.
The Law of Obligations Act distinguishes dwellings from business premises and practically rules out the possibility to use dwellings as business premises, and vice versa. Within the meaning of the Law of Obligations Act, a dwelling is a residential building or apartment that is used for permanent habitation. Business premises are premises used in economic or professional activities. (Section 272 of the Law of Obligations Act)
The Supreme Court has agreed in its judgement that it is reasonable to assume that a building will be used for the purposes specified in a detailed plan or building permit. At the same time, it is important to know that the classification of purpose for use of construction works which distinguishes residential buildings from non-residential buildings in construction law differs from the classification between dwellings and business premises within the meaning of subsection 272 (1) of the Law of Obligations Act. Thus, the legislative or regulatory provisions of construction law do not forbid the usage of residential building or an apartment that is located in a residential building for temporary residence. Likewise, an apartment that is located in a residential building may be used for providing accommodation services, i.e. in economic activity. (RKHK 3-3-1-47-15)
Unlike ordinary apartments that are meant for use as places of residence, the purpose for use of holiday apartments is business. If a taxpayer has really been using a holiday apartment as his/her place of residence until its transfer and that is proven, the application for tax exemption to the sale of such an apartment may be justified in exceptional cases.
Gains from the transfer of immovable property are not subject to income tax if the essential part of the immovable or the object of apartment ownership or a right of superficies is a dwelling and all the following three conditions are met:
- the dwelling has been transferred to the taxpayer’s ownership through privatisation with the right of pre-emption
- the land adjacent to the dwelling has been transferred to the taxpayer’s ownership through privatisation with the right of pre-emption
- the size of the registered immovable property does not exceed 2 hectares.
The dwelling house is inherited (given as a gift), with 0.6 hectares of land privatised with the right of pre-emption, and the owner did not use the house as a residence. The total costs related to the inheritance (giving) process or improving or upgrading the dwelling are 19 670 euros and the cost of privatising the land with the right of pre-emption is 1800 euros. The registered immovable was sold for 70 000 euros. The amount subject to taxation is 70 000 - 19 670 - 1800 = 48 530 euros.
Since one of the above-mentioned conditions is not met in this example (the dwelling is not privatised with the right of pre-emption), the income tax exemption cannot be applied and the income received is taxed.
Income tax is not charged on the gains received from the transfer of immovable, if the essential part of the immovable or the object of apartment ownership or a right of superficies is a dwelling and the immovable has been transferred to the taxpayer’s ownership through restitution of unlawfully expropriated property (for example a house that was returned as a movable and registered and transferred as an immovable).
Income tax is not charged on the income derived from the transfer of a summer cottage or garden house if both of the following conditions are met:
1. The summer cottage or a garden house has been in the taxpayer’s ownership as a movable or an essential part of an immovable for more than two years, and
2. The size of the registered immovable does not exceed 0.25 hectares.
If the summer cottage or garden house to be transferred has been acquired by a leasing contract, the start time of the ownership is the date on which the leasing contract was concluded.
Gains from the transfer of property returned in the course of ownership reform, for example gains from the transfer of returned forest land, is exempt from income tax. However, gains from the transfer of standing crop of the returned forest land is taxed.
Pursuant to clause 15 (4) 5) of the Income Tax Act, income tax is not charged on the income from the transfer of land returned in the course of ownership reform. In the opinion of the tax authority, the wording of subsection 15 (4) of the Income Tax Act supports the application of the tax exemption with respect to the inheritor on the ground that point 5 of that provision does not make the exemption conditional on a particular person, but is based solely on the means of acquisition of the land. Therefore, it can be considered that the exemption applies to the first transfer of the land without buildings returned in the course of the ownership reform.
According to the guidelines of the Supreme Court, succession does not constitute a transfer transaction but is a legal succession arising from the law, so the exemption applies to a person who transfers the land returned in the course of the ownership reform for the first time, and in the opinion of the tax authority, it is not a proprietary right inseparably related to the person of the bequeather.
The property received by inheritance or gift (for example land, house, apartment etc. inherited or received as a gift in Estonia or abroad) is not subject to income tax.
If the immovable property inherited or received as a gift is transferred, income tax is payable on the gains received, unless the person was using the property as his place of residence until the time of transfer.
Income from the transfer of utility articles in personal use is exempt from tax.
Pursuant to the Acquisition of Immovable in Public Interest Act, income tax is not charged on the payment and compensation paid for acquisition, including expropriation, and the establishment of compulsory possession. The exemption also applies to income and compensation from the exchange of immovable property and land management carried out under the Acquisition of Immovable in Public Interest Act.
Last updated: 10.11.2021