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Tax exemption upon transfer of residence

Income tax is not charged on a dwelling which was used by the taxpayer as his or her place of residence until transfer (clause 15 (5) 1) of the Income Tax Act). The Income Tax Act also sets an additional condition: tax exemption is not applied to more than one transfer in two years (section 15 (6) of the Income Tax Act).

In actual practice, the application for tax exemption upon transfer of residence has raised questions in the following cases.

The transfer of...

dwelling with a storage room and parking space

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.

residential building or apartment that is not used as residence

In such a case, income tax is imposed on the gains from transfer of property pursuant to general procedure as the difference between the sales price and acquisition cost. The acquisition cost and costs associated with sale (notary fee, brokerage fee, state fees, valuation expenses etc.) can be deducted from the gains from transfer of property.

Only the price actually paid for the purchase, manufacturing and improving of immovable property is considered as the acquisition cost. Expenses made by another person or on behalf of another person cannot be regarded as acquisition costs. The acquisition of an immovable is proved by the entry in the land register. The immovable property received as a gift does not have an acquisition cost.

March 2018
 

17.08.2018