Income from real estate rent. Optimization and tax benefits
Do you plan to rent your apartment/house out but still have concerns regarding taxes? Then this material is exactly what you need. In this article, we will describe such a type of rental property, when an apartment owner rents it out as an individual without opening a business license.
First, let’s turn to the tax law and examine what specifically will be considered an income from rental property and who is obliged to submit reports on it.
Profit from renting is subject to taxation of 15% in accordance with §9, paragraph 1 (a) of the law on Income Tax (No. 586/1992).
Income from renting out a real estate
It is considered to be the funds received by an owner of the property directly from its lease. The income is approved by declaring the earnings and submitting a tax declaration before the 31st of March of the year that follows by the reporting one.
In this case, if an apartment is a joint property of spouses, a rental income can be included only to the one of the reports. The next year, the other party can receive the income from renting if such a case is beneficial.
In order to receive income from the lease, it is enough for an owner (individual) to fill in the Income Declaration for the previous year, namely – Annex 2 of it.
Note: these incomes are not subject to deducting advances for either social or health insurance.
So, let’s look at what exactly is included in the concept of income from rental property, and what is not:
The rent price does not include payments for services related to the usage of an apartment. Therefore, rental income does not include advances on heating, water heating, cleaning common areas in a house, usage of an elevator, water supply, control and cleaning of chimneys, ash and garbage removal, sewage treatment, etc. – the so-called apartment utilities. I.e. these are the services a landlord receives invoices for at the end of the year for the quantity from the above list that was actually provided.
Note: it is better to indicate the condition under which the rental amounts should be provided separately (the rental and the apartment utilities payments) in the lease agreement. Otherwise, if such an agreement states that all the services are included in the rental price, the whole rent sum is considered to be an income.
However, if a certain service is provided by a landlord (for example, monthly cleaning of an apartment), then the payment for it is the owner’s income according to the Law and thus, this type of income falls under the concept of ‘settlement’ or úbytovací služby (Czech), and such a type of activity requires registering as an individual. So if you decide to provide such a service to your tenant as an exception, think carefully.
What is the basis for the calculation of the tax?
The basis of the tax (tax base) is income without expenses related to maintenance and security of a real estate.
We will describe what can be included in the expenditure part of renting a real estate out.
The property owner can choose from two options:
1) fixed rate expenses – 30% of income (the so-called lump-sum system);
2) actual costs.
Fixed rate expenses – 30% of income (the so-called lump-sum system)
You, as a property owner, can choose a simplified cost accounting scheme: 30% of the income received. If you apply a fixed rate, 30% are all your expenses and nothing more than 30% can be deducted.
Here is an example:
You rent out an apartment for 12 000 CZK and the sum for utilities is 3.500 CZK.
Rental income will be 12 000 * 12 = 144 000 korunas.
Expenses will be 144 000 * 30% = 43 200 CZK.
Taxable base = 144 000 – 43 2000 = 100 800 korunas.
Tax equals 100 800 * 15% = 15 120 CZK.
Note: there is a limit of 300 000 CZK for lump-sum costs. Thus, if your rental income exceeds 1 million korunas (for instance, 1 500 000 CZK), then using a 30% lump-sum, it is possible to reduce the income by 300 000 CZK maximum (not 450 000 CZK).
This method of calculating a tax base has a number of advantages:
1. it is calculated from the net rental amount;
2. if the expenses of a property owner are small, this method can significantly reduce the tax base, namely by 30%;
3. there is no need in keeping all the receipts to provide them in case of Tax administration control;
4. this is a simplified accounting – you only keep accounting on receiving rental payments.
By the real amount of costs
If you decide using real costs as a tax base, it is necessary to keep the records on them.
The costs can include:
1) all the material expenses associated with repair, cleaning, purchase of furniture and all the other possible expenses you may incur during maintenance of a leased property;
2) all the expenses for apartment repairing (for instance, replacement of windows of one size, replacement of broken water taps), technical maintenance (painting), insurance, household equipment (buying a refrigerator, washing machines, teapots, furniture, etc.);
3) cost of car maintenance. You can also use it for property service. Prior to using car maintenance cost, it is necessary to prove its expediency. It can be done by keeping a transport book where you specify the time when a car was used precisely for the work connected with the rental activity;
4) % of a loan/mortgage if the credit money was used to purchase real estate;
5) depreciation on real estate itself, which is the main item of expenditure.
What is not included in the expenses?
1) advance payments if they are included in the rental price;
2) loan/mortgage payments.
In conclusion, it is always your decision which system to choose. You have the information and can tell what is more beneficial. Tax legislation even allows changing a system. I.e. one year you can use a simplified tax system: -30%, and the next year if it is more preferable, use real expenses system. However, it is not possible to revert the choice of the system, i.e. if you already submitted the report using a simplified system, then it is not possible to provide a more specific report using a real expenses system. This condition is specified in the Law, however, from the experience we know cases when the Tax Institution allowed submitting a more specific report using a real expenses system with the system change to the one more beneficial for a property owner.
How to determine what option to choose and when
You got property and prepared it for renting. The maintenance expenses for the first year will be huge: furniture should be purchased and so on. It is obvious that usage of the following variant will be more beneficial: income minus real costs until the time when expenses are stabilized and are lower than 30% of the profit. After this period, you can use lump-sum 30%.
As a rule, real expenses exceed lump-sum 30%. The main cost is the depreciation of real estate. Residential property maintenance is charged in the form of depreciation for 20 years. There are also a several types of depreciation: uniform, accelerated and with multiplying factors. To calculate the depreciation, it is necessary to determine the cost of the property.
If the period from the moment of its acquisition to the decision to lease is less than 5 years, the purchase price is used to calculate depreciation. If more than 5 years passed, it is necessary to order a real estate evaluation. In this case, depreciation will be calculated on the basis of the estimated value. If you received property as a gift, you should take into account the fact that the land is not depreciated with it. If a land belongs to your property, for example, this is a house with a plot – it is necessary to allocate only the price of the house itself for calculating depreciation (there are cases when only the total value is indicated in the sale contract, without separating the price of the plot from the house cost. In such cases, you will have to order a qualified assessment).
Tax calculation and the declaration submission
Income tax is calculated by this formula:
income – expenses = profit * 15% = tax
The calculated tax can be reduced according to tax exemptions. Every taxpayer, even if one is not a tax resident of the Czech Republic, is entitled to a tax benefit of 24 840 CZK per year.
There are also additional exemptions: on kids who reside with you in the Republic, on a non-employed spouse who resides with you and others, for receiving which it is necessary to fulfill certain conditions.
Tax to pay: calculated tax – tax exemption = tax to pay
Here is an example:
You rent out an apartment for 12 000 CZK
The income from renting will be:
12 000 * 12 = 144 000 korunas
Expenses are equal 144 000 * 30% = 43 200 CZK
Tax base 144 000 – 43 200 = 100 800 CZK
Tax equals 100 800 * 15% = 15 120 CZK
Now we deduct income tax exemption: – 24 840 korunas
Tax to pay equals zero.
It is obvious from the example that in case income is not quite big (approximately under 235 000 CZK – profit from renting for the whole year: 235 000 – 30% = 24 675 CZK – tax sum), exemption covers the tax completely, consequently, it is possible to choose the simplified option – lump-sum 30% and not to keep real expenses part.
If expenses exceeded income from renting, there is a loss. This loss can be used for reducing other incomes during the current year: from entrepreneurial activity § 7, owning property § 8, other incomes § 10 (for example, from the sale of real estate or dividends). Income from employment § 6 is an exception. If you do not have other incomes you could reduce a particular year, you can use the loss during the following 5 years.
A professional accountant will advise you the most profitable option. You have come to the right place! We have been providing accountant services for 12 years so far.