Sale of inherited real estate - how to settle in PIT?

In the vast majority of cases, the costs are individual, which means that they can only be deducted by the taxpayer who actually incurred them. There are, however, some exceptions to this general rule regarding the expenses incurred by the testator. In our article, we will consider whether the purchase of real estate made by the testator can then be settled by the heir in a situation where the sale of the inherited real estate takes place.

Principles of settling the tax on the sale of real estate

The initial step must be to precisely define the rules for settling the tax on the sale of real estate. This type of event is subject to PIT taxation.

First, attention should be paid to the content of Art. 10 sec. 1 point 8 of the PIT Act. This provision stipulates that the tax is payable for the sale of real estate for consideration, not performed as part of business activity, if it was made within 5 years from the end of the calendar year in which the acquisition took place.

As a consequence, the sale of real estate after the indicated grace period means that the tax liability will not arise at all.

It is also worth pointing out that the concept of real estate acquisition should be understood broadly. It will include all legal actions transferring ownership of the real estate. Therefore, in addition to the sale contract, it will be, for example, a life annuity contract, donation, inheritance division or the abolition of joint ownership.

Obviously, inheritance is also included in the group of activities constituting acquisition. As a result of acquiring an inheritance, the heir assumes all rights of the testator in relation to the inheritance share held. Inheriting real estate means that the heir acquires ownership of the real estate upon the death of the testator.

However, there is an important exception regarding the sale of inherited real estate. It is about Art. 10 sec. 5 of the PIT Act, indicating that in the case of the sale of real estate acquired by inheritance for consideration, the grace period is counted from the end of the calendar year in which the real estate was acquired or built or the property right acquired by the testator.

In the light of the above provision, when purchasing real estate by way of inheritance, the five-year tax period for sale is calculated from the end of the year in which the testator acquired the real estate. The moment of purchase of the real estate by the heir is irrelevant in this case.

The sale of real estate is subject to PIT tax at the rate of 19% if it was made within 5 years from the end of the calendar year of acquisition. Different rules apply when real estate is acquired by inheritance.

Determining the tax base for the sale of real estate

Then let's move on to the issue of determining the tax base and tax rate. In this regard, it will be appropriate to refer to the content of Art. 30e of the PIT Act.

Pursuant to this provision, income tax on income from the sale of real estate against payment is 19% of the tax base.

The basis for calculating the tax is the income constituting the difference between the income from the sale of real estate or rights for consideration determined in accordance with Art. 19 and the costs determined in accordance with art. 22 sec. 6 c and 6 d, plus the sum of the depreciation referred to in article 1. 22 h of paragraph 1. 1 point 1, made from the sold real estate or rights.

As you can see, the tax base is income understood as the difference between the sales revenue (ie the price obtained from sale against payment) and tax costs.

It is the categories of tax costs that we will take a closer look at.

Sale of inherited real estate and tax costs

Pursuant to Art. 22 sec. 6c of the PIT Act, tax deductible costs for the sale of real estate, subject to paragraph 6 d, are documented costs of acquisition or documented production costs, increased by documented expenditure that increased the value of things and property rights, made at the time of their possession.

Thus, the basic category of cost is the expenditure incurred to purchase real estate.

Essentially, this is about the actual expense that the buyer of the property had to pay. We are therefore talking about a real and economic expense. For example, the market value of the real estate agreed by the parties in the notarial deed cannot be considered the cost of purchase. There is no law on the sale of real estate for consideration, which allows it to be deducted from income as the cost of obtaining its market value.

In addition, it is indicated that the cost should be actually incurred and not estimated expenses. Hence the need to document them. Deduction of acquisition costs that have never been incurred is against the essence of the institution of tax deductible expenses.

Thus, in the case of purchase of real estate under contracts for pecuniary interest (e.g. a contract of sale), we are dealing with the actual expenditure on the acquisition, which may then constitute a cost in the event of a paid sale.

The situation is different, however, in the case of real estate acquisition based on free-of-charge contracts. For example, in the case of a purchase by means of a donation, there is no cost of acquisition, because the recipient receives the property free of charge. In such a situation, we cannot talk about an expense for an acquisition, i.e. a purchase cost.

It should be noted, however, that Art. 22 sec. 6c is valid subject to the provisions of paragraph 2. 6d.

According to Art. 22 sec. 6d of the PIT Act, for the tax-deductible costs of the sale of real estate, referred to in art. 10 sec. 1 point 8 lit. a-c, acquired by inheritance, donation or otherwise free of charge, it is considered documented expenditure that increased the value of things and property rights, made at the time of their possession, and the amount of inheritance and donation tax paid in such a part as the value the sold item or right accepted for taxation with the tax on inheritance and donation corresponds to the total value of the item and property rights adopted for taxation with the tax on inheritance and donation.

Start a free 30-day trial period with no strings attached!

To tax deductible costs for the sale of real estate and rights referred to in article 1. 10 sec. 1 point 8 lit. a-c, acquired by inheritance also include the documented cost of acquisition or production incurred by the testator and the taxpayer's inheritance burdens, to the extent that the value of the goods sold or rights sold corresponds to the total value of goods and property rights acquired by the taxpayer. The inheritance burdens referred to in the second sentence shall mean the inheritance debts repaid by the taxpayer, claims for a reserved share satisfied and ordinary entries and orders made, also in the event that the taxpayer has paid off inheritance debts, satisfied claims for a reserved share or performed ordinary entries and orders after the disposal for consideration, as referred to in art. 10 sec. 1 point 8 lit. a – c.

In the case of the sale of real estate acquired free of charge, the taxpayer may take into account only the expenditure on the real estate (e.g. expenditure incurred for renovation) and the inheritance and donation tax, if any.

The breach from the above is a further part of the provision added in 2019, indicating that if we are dealing with an acquisition by inheritance, then the cost is the purchase expense incurred by the testator. Such content means that if the testator acquired the property by way of a purchase contract, the heir who will be selling the property may take into account the expense incurred by the deceased testator as an expense.

Therefore, the above constitutes a departure from the general rule stating that only the actual expenditure may be taken into account as an expense.

In the case of the sale of real estate obtained by inheritance, the taxpayer may include as a cost an expense that he has not incurred himself. Art. 22 sec. 6d of the PIT Act allows for the inclusion in the tax costs of the purchase expense incurred by the testator.

Moving on to the summary and at the same time to the answer to the question asked in the title of our article, let us point out that the heir settling the PIT tax on the sale of real estate acquired in inheritance may take into account the purchase expenses incurred by the previous owner, i.e. the testator.