Before charging the 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. If the documentary evidence is missing, the expenses made are not taken into account by taxation.
Gains or loss from transfer of property means:
- upon sale – difference between the sales price and the acquisition cost of property where the expenses directly related to the sale of property have been deducted;
- upon exchange – difference between the market price of property received as a result of exchange (average local price) and the acquisition cost of the exchanged property, where the expenses directly related to the exchange of property have been deducted.
Acquisition cost of property means:
- Expenses made for obtaining (acquisition) property (e.g. purchase price);
- Expenses incurred by improvement (e.g. renewal of a house) and supplementing (e.g. extensions of the buildings);
- Commissions and fees paid upon acquisition of property (e.g. notary fees, state fee, etc. paid by a purchaser and other payments reflected in the contract or related to the contract);
- Acquisition cost of property acquired by way of a financial lease is the total amount of contractual lease payments or down payments without interest;
- Acquisition cost of a self-manufactured thing means the total amount of expenses incurred in manufacturing the object (e.g. construction costs of a building);
- If a person transfers the property, which has been previously taxed as property taken into personal use by a sole proprietor, the amount added to business income is the acquisition cost from the transfer of such property;
- In the case of the property received by succession the acquisition cost shall include only the expenses made by the successor.
Expenses directly related to transfer of property mean:
- expenses inevitable on concluding a transaction (e.g. a notary fee paid by the seller, state fee and other payments related to concluding a contract);
- expenses made for the benefit of concluding a more successful transaction (e.g. a broker's fee, property assessment fee);
- upon the transfer of the right to cut standing crop and felled timber, the expenses relating to forest management ;
- service fees paid for logging and transportation of timber are the expenses related to the sale of timber.
Both the acquisition costs and the transfer costs must be certified.
It is not possible to deduct from gains the general expenditures related to asset managing (e.g. the expenses on maintaining the transferable apartment – payments for redecoration: changing wallpapers, painting, etc., administrative expenditures, utility costs, bills for electricity, etc.).
Example No. 1
A person has acquired an apartment for 25 000 euros (the acquisition cost) and the person sold the apartment for 40 000 euros (the sales price). The apartment was not used as a residence. The expenses directly related to the sale (asset assessment, expenses related to the sales contract, etc.) were about 2000 euros and this amount may be deducted from the income. However, the maintenance expenses made before sale of an 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.
Gain from the sale of an apartment subject to income tax is calculated as follows:
40 000 – 25 000 – 2000 = 13 000 euros.
Income tax rate is 20%, the amount of income tax is calculated as follows: 13 000 × 0,20= 2600 euros.
Accordingly, the formula for calculating the taxable gain received from the sale of property is as follows:
SALES PRICE – ACQUISITION COST – EXPENSES DIRECTLY RELATED TO THE SALE = GAIN SUBJECT TO INCOME TAX
Example No. 2
Years ago, a person had acquired a two-room apartment for an acquisition cost of 35 000 euros and the person did not use this apartment as its residence but hired it out. Now the person is going to make an exchange transaction and have a three-room apartment instead of this two-room one. The market price of these two flats at the time of the exchange transaction was 57 500 euros. The contractual expenses related to the exchange and the state fee and a notary fee are 2100 euros.
Gain subject to income tax from the exchange of apartments is: 57 500 – 35 000 – 2100 euros. As a result of the exchange the person received 20 400 euros of taxable income. Income tax rate is 20% and income tax charged on the gain is: 20 400 × 0,20 = 4080 euros.
In this example it should be taken into account that the provisions applicable by a sales transaction are also applied by an exchange transaction, and both parties of the contract are at the same time the sellers and the purchasers. Usually, the price of the exchanged things is equivalent.
Accordingly, the formula for calculating taxable gain is as follows:
MARKET PRICE OF THE PROPERTY RECEIVED THROUGH THE EXCHANGE – ACQUISITION COST OF THE PROPERTY EXCHANGED – EXPENSES DIRECTLY RELATED TO THE EXCHANGE = GAIN SUBJECT TO INCOME TAX