Income taxation of the real estate transfer
When selling real estate, people often pay more income tax than necessary. If a person sells real estate and cannot use a tax exemption, income tax must be paid. In general, not the sale price of the property (the value of the property), but the profit received from the transaction, is subject to taxation.
Income tax must be paid on the sales price if the person received the property as a gift or inheritance and has not spent any money on improving the property themselves. They can still deduct the transaction costs of acquiring and transferring the property from the sale price, provided there are supporting documents.
The Income Tax Act explains that profit is the difference between the acquisition cost and the sale price of the sold asset. The acquisition cost includes all documented expenses incurred by the taxpayer for acquiring the property and for its improvement and enhancement. Additionally, people have the right to deduct from the sale price of the property any documented expenses directly related to the sale.
The Income Tax Act does not specify what constitutes “documented expenses” or the exact level of detail the tax authority can require as proof. Case law resolutions give the best indication in this case.
Documents that need to be preserved
The courts have clarified that the document proving the expense must contain:
- the content of the expenditure
- the time of expenditure
- details of the payer
- details of the recipient
In addition to the invoice for the expense or the contract related to the improvement of the real estate, the taxpayer must also provide a payment order or bank statement confirming the payment. Unfortunately, without the complete set of necessary documents, the tax and customs office will not allow the costs to be considered or deducted from the profit.
Since the purchase and sale of real estate often occur with a significant time gap, it can be very difficult or even impossible to obtain documents proving the payment of the expense later on. Because the law requires a documentary form of proof for expenses, missing documents cannot be replaced with other evidence such as the taxpayer’s explanations, pictures, or email correspondence.
How long should expense records be kept?
Courts have acknowledged that there is no specific deadline for preserving documents that prove the cost of property acquisition. To deduct the acquisition cost from the sale price of real estate, a person must have these documents at the time the profit is realized (at the transfer of the real estate) and also in the following years during the statute of limitations for potential tax assessment. In certain situations, this could be many years after the property was acquired.
Does this obligation also apply to the common man?
An ordinary person is not liable for accounting, but according to the Income Tax Act, they must keep documents related to income and expenses.
What if there are no documents?
If the complete set of documents certifying the acquisition cost of the property is not available, the incurred expenses cannot be deducted from the profit. In practice, this is why people often pay more income tax when transferring real estate than necessary.
The law allows the tax authority to determine the amount of tax through an assessment in some situations. This means the tax authority organizes an appraisal of the property and the improvements made to identify the new and correct tax base. However, judicial practice indicates that this can only be done in exceptional cases, and the taxpayer generally cannot demand it from the tax authority. Widen’s tax team recommends requesting an appraisal whenever evidentiary issues arise.
Summary
- When acquiring real estate and especially starting to improve it, keep all contracts and invoices and payment orders confirming the payments or at least bank account statements reflecting the payment.
- Documents must be kept until the property is sold.
- If the documents are not there, the person has to pay more income tax than he could have.
- Most of the time documents cannot be recovered in the future. The tax administrator will also not be able to assist with the recovery, and he might not be able to consider the costs incurred through the assessment. The obligation to preserve documents and the burden of proof of expenditure rests on the taxpayer. A real estate assessment must be requested if necessary.