Settlement of renting apartments by the landlord as part of business activity


Income from the rental of real estate may be classified under two sources of income: business activity or private rental. In this article, we will analyze how the settlement of rental housing as part of the activity is carried out. In addition, we will address the issue of incurring costs during the break in the rental period.

Settlement of flat leases in tax books

The first element to be defined is how the rented apartments are classified in the tax books. In this regard, it should be noted that real estate rented by the entrepreneur will be considered fixed assets.

Analysis of the content of art. 22a paragraph. 1 of the PIT Act indicates that premises that are separate property of the taxpayer, complete and fit for use on the date of acceptance for use, with an expected period of use longer than one year, put into use on the basis of a lease agreement, constitute a fixed asset subject to depreciation.

This means that the cost of purchasing a rented apartment is accounted for through depreciation, and not by directly recognizing the expense in tax costs.

Depreciation write-offs are made starting from the first month following the month in which the fixed asset was entered into the register of fixed assets and intangible assets. The asset is entered into the records not later than in the month of putting it into use.

A complete and serviceable dwelling that is rented is a depreciable fixed asset for the taxpayer conducting business activity.

Depreciation in the period when the premises is not rented

It is natural that the premises intended for rent will remain empty for some time due to the lack of tenants. Not every completed tenancy is immediately replaced by the next tenant.

Therefore, entrepreneurs may have doubts as to whether in such circumstances they can still recognize depreciation write-offs for a dwelling in their costs.

The problem becomes even more real in the light of Art. 22c point 5 of the CIT Act, which states that assets that are not used as a result of the suspension of economic activity are not subject to depreciation under the provisions on the suspension of economic activity or the cessation of activities in which these components were used; in this case, these components are not depreciated from the month following the month in which the activity was suspended or discontinued.

Is the quoted provision the basis for refusing to grant entrepreneurs the right to depreciate a dwelling for the period of lack of a tenant?

Fortunately for taxpayers, the tax authorities are not so strict in the interpretations they issue and present a favorable position. From the content of the available interpretations (e.g. the individual interpretation of the Director of the National Clearing House of October 31, 2018, No. renting, he retains the right to make tax depreciation. Interestingly, the tax office makes this circumstance dependent on the active search for a tenant.

As a result, Art. 22c point 5 of the PIT Act will apply to cases in which the fixed asset has been completely excluded from economic activity as a result of an autonomous decision of the taxpayer, which is not the case in the described state.

Therefore, we can indicate that if the break in the lease is only temporary and independent of the taxpayer, who at the same time makes efforts to search for a tenant, the temporary break in the lease is not a premise justifying the cessation of depreciation write-offs. As a result, situations such as a holiday break or early termination of a lease agreement will not cause negative tax consequences for the entrepreneur.

Example 1.

The taxpayer conducts economic activity in the field of renting his own real estate. It has 3 premises that it rents to students. In accordance with the agreement concluded with the students, the premises are not rented during the holiday season. Despite this temporary interruption, the taxpayer has the right to make depreciation write-offs and include them in tax deductible costs for the months from June to October.

Example 2.

The taxpayer conducts economic activity in the field of renting his own real estate. The tenant of one of them terminated the contract early. The taxpayer was actively looking for a tenant through advertising portals, but only after 6 months did he find one. Nevertheless, it can make depreciation charges for the break in the lease.

In the period when the apartment is not rented by the taxpayer, and the taxpayer takes active steps to search for a tenant, and the break in renting itself is only temporary, it is possible to include in the tax costs depreciation write-offs made for the break in renting.

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Maintenance expenses for the rented premises

On the other hand, the eligible expenses for the maintenance of the premises (e.g. utility costs), which are to be borne by the property owner, are different. Such expenses are not depreciated and are charged directly to tax expenses.

Similarly, however, as in the case of depreciation, also in this case the taxpayer has the option of including the costs of housing maintenance during the break in renting.

Let us remind you that in order to recognize the expense as tax deductible costs, the conditions specified in the general definition of the tax cost specified in Art. 22 sec. 1 of the PIT Act.

It follows from the content of the above provision that the recognition of the expenditure in tax costs depends on the existence of a specific cause and effect relationship, which consists in the fact that the expenditure is incurred, inter alia, in order to preserve and secure the source of income. In the light of the norm thus constructed, there can be no doubt that the cost of maintaining an apartment during a break in renting is incurred in order to secure the potential future rental income.

Example 3.

A taxpayer running a business in the field of renting his own real estate decided to renovate one of the premises. The renovation was aimed at restoring usable condition and refurbishing the apartment, which in turn was intended to attract more potential tenants who would be willing to pay more rent. During the renovation period, when the premises were not rented, the taxpayer bore the costs related to the maintenance of the premises (interest on the loan taken out for the purchase of real estate, property tax, etc.). The current cost of living is incurred to secure future income and therefore may constitute a tax deductible expense.

Settlement of apartment lease by a taxpayer running a business also includes current expenses for maintaining the property. Unlike the initial value of the property, this type of expenditure is not amortized, but is charged directly to tax. The possibility of treating them as a cost also applies to the period when there is a break in renting.

As can be seen from the presented position, a taxpayer running a business in the field of apartment rental may incur multiple expenses which, depending on their qualifications, are recognized in tax deductible costs in various ways.

From the perspective of the taxpayer who is the lessor, the key is the information that the tax authorities present a favorable interpretation of tax regulations when it comes to the possibility of settling expenses in the period without rent. If the break in renting is caused by objective circumstances and the taxpayer takes active steps to attract tenants, it is possible to classify them as tax costs.