Additional income and private rental - what should you remember?

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Taxpayers who rent out real estate often tax the income earned with a flat rate. As practice shows, tenants often have problems determining how to tax additional rental income, such as compensation or interest. Should the additional benefits be treated as rental income or not?

The PIT Act contains a catalog of sources of income taxable with personal income tax. The enumeration of the origins of sources of revenue is aimed at grouping these sources according to a similar nature, which then results in a differentiated treatment of these sources.

Separate sources of income include:

  • rental, sublet, lease, sublease and other contracts of a similar nature, including lease, sublease of special departments of agricultural production and a farm or its components for non-agricultural purposes or for running special departments of agricultural production, with the exception of assets related to economic activity,

  • other sources.

Rental income is taxed on general principles, unless the taxpayers submit to the competent head of the tax office a written declaration on the choice of taxation in the form of a lump sum on recorded income, on the principles set out in the Lump-sum Income Tax Act.

On the other hand, pursuant to Art. 2 clause 1a of the Act on flat-rate income tax on certain revenues earned by natural persons, natural persons obtaining revenues from rental, sublease, lease, sublease or other agreements of a similar nature, if these agreements are not concluded as part of their business activity, they may pay a lump sum on recorded revenues.

At the same time, lump-sum taxation on recorded revenues also applies to money and monetary values ​​received or made available to the taxpayer in the calendar year, as well as the value of benefits received in kind and other free benefits under rental, sublease, lease, sub-lease or other contracts of a similar nature.

Therefore, a problem often arises whether to qualify additional income as rental income or additional income. It is extremely important as it can change the way of taxation. Below we present additional, most frequently appearing benefits related to the lease.

Late payment interest

Pursuant to Art. 481 § 1 of the Civil Code, if the debtor is late with the payment, the creditor may demand interest for the delay, even if he has not suffered any damage and even if the delay was a consequence of circumstances for which the debtor is not responsible.

Interest is incidental to the main performance - it is the result of default. In the case of lease, the main benefit is the rent, while interest is an additional, collateral benefit, receivables due to delay in the payment of the main benefit.

Therefore, interest cannot be taxed as the main benefit (i.e. rental) as a lump sum. Such a position was confirmed by the Supreme Administrative Court in the resolution of June 6, 2016, file ref. II FPS 2/16. When resolving the legal issue, the Supreme Administrative Court took the binding view that:

Interest for late payment of the price for the sold shares should be included in the income from other sources referred to in Art. 10 sec. 1 point 9 in connection with Art. 20 paragraph 1 of the Personal Income Tax Act (...).

Compensation for early termination of the contract

Provisions providing for compensation in the event of early termination of the contract appear extremely often in lease contracts.Such compensation should also be treated as income from other sources. This position is also confirmed by the tax authorities. An example is the letter of the Director of the Tax Chamber in Warsaw, ref. No. IPPB1 / 4511-1435 / 15-2 / AM, dated February 9, 2016, where we can read:

In the case under consideration, the funds will be paid to the Applicant by the tenant in exchange for early termination of the lease, and not as rent related to the use of the premises by the tenant. The received money - in this part - is only indirectly related to the rental of the business premises, thus should be included by the Applicant in the source of income specified in Art. 10 sec. 1 point 9 of the Personal Income Tax Act, and not, as indicated by the Applicant, that these funds will constitute rental income taxed at the rate of 8.5% (or 12.5% ​​- the rate applied from 2018, if the rental income exceeds PLN 100,000 in a given year).

Taxation of income from other sources

In the light of the above, in the light of the description of the facts presented in the application, based on the applicable legal regulations, it should be stated that the funds received by the Applicant - paid by the tenant in exchange for early termination of the lease - should be classified as the source of income specified in Art. 20 paragraph 1 in conjunction joke. 10 sec. 1 point 9 of the Personal Income Tax Act and be taxed on general principles. (...)

Importantly, it is only in the tax return that the tenant will be obliged to show interest or compensation income along with other income and calculate the tax due for a given year from the total amount.

It is worth remembering that taxpayers are required to submit a tax return to the tax offices in accordance with the established formula, with the amount of income earned (loss) in the tax year, by April 30 of the year following the tax year.

Such a position was confirmed by the Director of the Tax Chamber in Katowice, in the individual interpretation, ref. No. IBPBII / 2 / 4511-329 / 15 / MW, from June 11, 2015, where we can read:

(...) interest on late payment of rent - contrary to the claim of the Applicant - may not be taxed in the same way as rent, i.e. lump-sum income tax, because interest is incidental to the main benefit, i.e. rent. Income from the above-mentioned interest - in accordance with art. 10 sec. 1 point 9 in connection with Art. 20 paragraph 1 above Acts - should be classified among other sources. This income is subject to taxation according to the tax scale specified in art. 27 above of the act and should be shown by the Applicant in the PIT-36 statement (...).