Sale of a plot of land with a house built on it and income tax (PIT) relief – the devil is in the detail

One of the best known tax reliefs is the exemption related to the sale of real estate five years after its acquisition or construction. Nevertheless, it is this statutory wording: “before the expiry of five years counting from the end of the calendar year in which the acquisition or construction took place” has caused some controversy.

It is also worth clarifying that this exemption refers to the disposal of real estate against payment, which is a broader concept than the sale itself. It also includes exchange and other dispositions of property or a property right transferring ownership to another party (e.g. by an agreement to cancel co-ownership against payment).

Namely, a problem has arisen with regard to the sale of land together with a building constructed on it by the owner if the land was acquired earlier than five years ago and the building was constructed much later. There were several possibilities for the tax recognition of a transaction involving land and a building. Initially, the prevailing view was that since the building was constructed before the expiry of five years from its sale, when selling it together with the land, one cannot benefit from the tax exemption indicated above.

This view has changed radically in recent years, this time in favour of taxpayers. It is now assumed that in the case of a transaction involving the sale of land together with a building, it is the date of purchase of the land that is decisive for taxation, not the moment when construction is completed.

This makes it possible to sell the house tax-free, even immediately after its construction. The condition is, of course, that five years have already passed from the end of the year in which the land was acquired to the date of the sale.

When considering a sale, it is also necessary to remember how to calculate the period in question. It is not calculated from the date of purchase of the real estate in question, but from the end of the year in which this took place.

There is, however, an important exception to this principle related to the essence of the property right itself. Namely, if according to the provision of Article 48 of the Civil Code, buildings belong to the components of the land. Which means that ownership of the land extends to ownership of the property (as well as planting and other structures) on it.

Perpetual usufruct

The situation is different when a building is constructed on land granted for perpetual usufruct. In such a case, the buildings become the property of the perpetual usufructuary of the land. Ownership is acquired in this case when the building is constructed. Thus, a perpetual usufructuary selling a building together with the right of perpetual usufruct of the land on which the building is located must separately recognise the date of acquisition of perpetual usufruct and the date of construction of the building. If the tax exemption period has not elapsed since the latter, the income from the transaction may be subject to income tax.

There is another particular situation associated with perpetual usufruct. While the commencement of construction on land owned by a given person is treated in the same way as the construction of a building, in the case of perpetual usufruct the situation is different. The sale of the perpetual usufruct right may benefit from an exemption under the conditions discussed in this article. However, the sale of “construction in progress” must be treated separately. This constitutes an expenditure on another person’s land which is a property right. Their sale is therefore treated as a separate source of income which does not benefit from the income tax exemption in question.

It should be also added that the construction of a building is understood as a commission. We should also remember that this tax exemption does not apply to sales conducted within the framework of the seller’s business activity. However, it is not a question of carrying out any economic activity, the asset of which is land with a building.

The exclusion from the exemption only covers cases of transactions carried out by entrepreneurs in accordance with the scope of their economic activity. The sale of real estate by a natural person engaged in other business activities which are not related to the construction and marketing of real estate may also benefit from the tax exemption in question.

Finally, it should be pointed out that even the fact of selling the land together with the building before the expiry of the five-year period does not necessarily mean that income tax has to be paid on the income thus obtained. First and foremost, the sale must result in an excess of revenue over its cost. In the case of an investment to build a house, the cost can be considerable. The tax is paid only on the difference between the price obtained and the costs mentioned above. Moreover, the seller may benefit from housing tax relief, i.e. use the proceeds to satisfy his own housing purposes. If he does so within two years from the end of the calendar year in which he disposed of his property, he will be entitled to apply for this relief.

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