House flipping in the light of the provisions of the PIT and VAT Act

Service-Tax

House flipping is the name of a way of making money by buying a property to renovate it and then selling it quickly for a profit. After the capital has been obtained, the person buys the next property with the money received and repeats the entire process, generating income. Taking into account the wording of tax regulations, it is worth considering whether a natural person who wants to operate in the house flipping industry meets the conditions for being considered an entrepreneur running a business.

House flipping in the PIT light

Is house flipping an economic activity in terms of income tax? The answer to this question depends on the scale of activity of a given entity. If we refer to the definition of economic activity contained in the PIT Act, we will notice that the provisions recognize the following as gainful activity:

  • manufacturing, construction, trade and services

  • consisting in searching for, identifying and extracting minerals from deposits,

  • consisting in the use of things and intangible assets,

  • conducted on its own behalf, regardless of its result, in an organized and continuous manner.

Therefore, as it clearly shows from the definition presented, the characteristic features of the conducted economic activity are its earning purpose, conducted on one's own behalf, in an organized and continuous manner. Therefore, if the taxpayer makes a one-off house flipping transaction, we will not be dealing with a continuous activity. Consequently, it will not be possible to classify such a natural person as an entrepreneur. If, on the other hand, the taxpayer carries out several or a dozen house flipping transactions, engages appropriate funds for this and is focused on making a profit, all the conditions for recognizing such activity as an economic activity are met. It is worth noting here that the result of the activities undertaken is not significant for classification as economic activity.

Example 1.

The taxpayer bought an apartment in an old tenement house. He renovated them on his own and sold them at a profit. With the money he obtained, he went on a trip around the world. Due to the fact that it was a one-off transaction that was not continuous, it cannot be considered an economic activity (however, the tax may occur if the property was sold within 5 years from the end of the calendar year in which it was acquired) .

 

Example 2.

The taxpayer, having a lot of capital, purchased a few flats and decided to sell them after general renovations. Unfortunately, due to the collapse of the real estate market, the entire operation brought him a loss. Despite the lack of profit, such house flipping is a business.


If house flipping is considered a business activity, it is worth analyzing how such transactions should be taxed. As a rule, income from business activity is the sale of property used for this activity. This means that the rules applicable to business activity should be applied to the sale of real estate. House flipping as a specific nature of the sale of real estate as part of a business

However, the legislator provided for an exception to the above rule. Well, income from business activity does not include income from disposal for consideration used for the purposes related to the business activity of a residential building, its part or share in such a building, a residential premises constituting a separate real estate or a share in such premises, land or a share in land or the right of usufruct. perpetual land or share in such right, related to this building or premises, cooperative ownership right to a dwelling or participation in such right, and the right to a single-family house in a housing cooperative or participation in such law.

In this case, the rule set out in Art. 10 sec. 1 point 8 of the PIT Act, which provides that the tax is payable for the sale of real estate for consideration, if it took place within 5 years from the end of the calendar year in which the acquisition took place. Such a transaction is taxed at a rate of 19%.

Example 3.

In 2015, the taxpayer purchased four apartments. He renovated and modernized all of them, and then sold them in 2017. Due to the fact that only 2 years have passed from the end of the calendar year in which the acquisition took place, the income obtained should be taxed at the rate of 19%

 

Example 4.

If the taxpayer from the above example would dispose of all real estate after December 31, 2020, the tax will not arise because the five-year period in which the sale of real estate requires the payment of tax will elapse.

House flipping in the light of VAT

Undoubtedly, also on the basis of the VAT Act, house flipping transactions can be classified as related to the conducted business activity. As indicated by the provisions of the Value Added Tax Act, economic activity includes all activities of producers, traders or service providers, including entities acquiring natural resources and farmers, as well as the activities of freelancers. Economic activity includes, in particular, activities consisting in the use of goods or intangible assets on a continuous basis for commercial purposes. In particular, the last sentence confirms that purchasing, renovating and then selling residential premises is a continuous commercial use of goods.

In VAT and sales of residential premises, the issue of the rate to be taxed on such a supply is very interesting. Namely, in the light of Art. 41 sec. 12 of the VAT Act, the tax rate of 8% applies to the supply, construction, renovation, modernization, thermal modernization or reconstruction of buildings or parts thereof included in the construction covered by the social housing program, with the proviso that only residential premises with a usable area does not exceed 150 m2. In the case of dwellings with an area exceeding a certain limit, the rate of 23% is applied to the remaining part.

Example 5.

The taxpayer bought several flats in order to sell them further. One apartment measures 182 m2. He made a major renovation of this apartment and then sold it. Due to the fact that, in the light of the VAT Act, the taxpayer conducts business activity, the sale should be subject to VAT. The value of an apartment appropriate for 150 m2 should be taxed at the rate of 8%, while the remaining part corresponding to 32 m2 should be taxed at the rate of 23%.