When to Pay Income Tax on Real Estate Sales and When Not To

Brokers are often approached by worried people who are afraid to sell their inherited real estate because they fear tax obligations. Various myths also circulate about the law that allows one to sell one residence tax-free within two years.

Sometimes people cannot get help from the tax office either, because when calling the information line, the official often cannot answer the questions, which creates increasing confusion and fear.

If a person sells their permanent or primary residence, it does not need to be declared in the income declaration, meaning it is not counted as annual income. Whether it is inherited, gifted, purchased, returned, or privatized with a purchase right, that is not important here, meaning how it was acquired does not matter. A primary or permanent residence means that it is possible to prove that it has been used as a home – there are electricity and utility bills. Registration alone is not sufficient.

A misconception is that a person must have lived in their house or apartment for two years before they wish to sell it – then they will not have a tax obligation. In fact, the law states that within two years, a person can sell one residence tax-free – it is not precisely defined how long they must live there. If a person has an apartment that they rent out, and they wish to sell it, it is not their permanent or primary residence. Thus, to use the tax exemption, the person should move back into that apartment for a while until it is sold. The tax exemption applies only if the person used the apartment as their residence until the sale.

There are only a few things to remember to sell your real estate tax-free:

1. You must be able to prove that it is your permanent or primary residence

2. You can only sell one residence within two years where the tax exemption can be used.

This means that if a person wishes to sell two apartments within two years, they must declare the second sale, but taxes must be paid not on the total amount, as is sometimes mistakenly believed, but only on the profit earned. If an apartment is sold for 5,000 euros more than the purchase price, transaction fees (notary fees, levies, and broker services) and these documented expenses that significantly improved the apartment's condition – for example, bathroom renovation costs, window replacement, insulation, etc. – are deducted from that amount. A 20% income tax must be paid on the remaining amount. However, if no profit remains, then there is nothing to pay tax on. Transaction documents must be kept for at least 5 years.

The simple formula should be followed:

SALE PRICE – ACQUISITION COST – COSTS DIRECTLY RELATED TO THE SALE = TAXABLE GAIN

Article source: Moodne Kodu