From January 1, 2019, changes regarding the so-called residential relief, i.e. the provisions of the Polish Personal Income Tax Act, related to tax exemption on income from the gainful disposal (exchange) of real estate, entered into force. The new regulations make it easier to obtain an exemption.
How did the residential relief work before the amendment?
The tax obligation on the sale or exchange of real estate arises when the sale (exchange) of real estate or property rights is not made as part of business operations and takes place before the expiry of five years from the end of the calendar year in which the real estate was acquired or constructed. If the sale (exchange) occurs after this date, it is tax neutral when it comes to income tax. However, if it occurs before the expiry of the said period, the gain resulting thereof will be taxable. In such cases it is possible, though, to benefit from the so-called residential relief.
As a result, income from the gainful disposal (exchange) of real estate in the amount that corresponds to the product of the income and the share of expenses incurred for own residential purposes in the revenue from the gainful disposal (exchange) of real estate and property rights if, beginning on the day of gainful disposal, no later than within three years (until the end of 2018 it was two years) following the end of a tax year in which the gainful disposal occurred, the revenue earned from the disposal (exchange) of real estate or property right was disbursed on own residential purposes.
The achievement of own residential purposes should be understood as providing oneself with a “roof over one’s head” necessary for life purposes and constituting a kind of center of vital interests. In practice, the allocation of the entire income obtained from the sale (exchange) of real estate for own residential causes that all income will be exempt from tax.
What’s new from January 1, 2019?
A major change in favor of taxpayers is the extension of the deadline for earmarking the proceeds from the sale (exchange) of real estate for own residential purposes from two to three years from the end of the tax year in which the sale (exchange) took place. On the other hand, the provisions clarify that within this period the right to real estate or a specific property right should be acquired, so that the expenses incurred for own residential purposes are included in the relief.
In addition, taxpayers were granted the right to count expenses for the reconstruction or renovation of real estate that were incurred before the acquisition of real estate as expenses for their own residential purposes. The condition is that the taxpayer becomes the owner of the real estate within three years from the end of the tax year, in which the sale (exchange) of the previous real estate took place.
It should be remembered that even if, due to the relief, the taxpayer reaches 100 percent income tax exemption, it is still necessary to file a tax return indicating the amount of relief for residential purposes. If after three years it will turn out that the revenue from the sale (exchange) has not been spent on residential purposes, it will be necessary to correct the tax return and pay tax due together with interest on tax arrears.
Tomasz Piejak, trainee attorney-at-law, and Wojciech Jaranowski, Private Client Practice, GWW