Sale of real estate which is a commercial commodity and VAT

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Real estate transactions are a very important part of the market economy. Therefore, there is no doubt that entrepreneurs are interested in the correct settlement of the purchase and sale of real estate under tax law. In this article, we will look at the correct treatment of real estate transactions that are held for resale. The analysis will be carried out on the basis of VAT regulations.

Sale of real estate as a commercial commodity

Pursuant to Art. 5 sec. 1 point 1 of the VAT Act, the goods and services tax is subject to the paid delivery of goods and the paid provision of services within the territory of the country. However, pursuant to Art. 2 point 6 of the Act, goods and their parts, as well as all forms of energy, are considered goods. As a result, the real properties meet the statutory definition of goods, and their sale is treated as a paid delivery of goods within the territory of the country.

The above means that under the provisions of the Value Added Tax Act, real estate is always considered a good. This is a different concept from the one that applies to income tax, because, depending on the conditions met, real estate may be considered a commercial commodity or a fixed asset.

There is, however, a certain tax issue regarding the sale of real estate, which makes the sphere of VAT and PIT mutually permeable. Details later in the study.

Exemption from the sale of real estate

As indicated, the sale of real estate constitutes a supply of goods against payment, which is subject to VAT. It should be noted, however, that the legislator provided for specific regulations in the content of the act, allowing taxpayers to take advantage of the tax exemption.

It is not uncommon for entrepreneurs to buy buildings or premises from natural persons and then, after renovation or reconstruction, they sell the property to the next buyer. In such a case, Art. 43 sec. 1 point 10a of the VAT Act. Pursuant to the aforementioned regulation, the delivery of buildings, structures or their parts not covered by the exemption referred to in Art. 43 sec. 1 point 10 of the VAT Act, provided that:

  1. in relation to these objects, the person delivering them was not entitled to reduce the amount of tax due by the amount of input tax,

  2. the person who delivered them did not incur the costs of their improvement, in relation to which he was entitled to reduce the amount of tax due by the amount of input tax, and if he incurred such expenses, they were lower than 30% of the initial value of these objects.

Consequently, in order for the sale of real estate to benefit from the exemption described in Art. 43 sec. 1 point 10a of the VAT Act, both conditions described in this provision must be met.

In a situation where the acquisition takes place from a natural person who does not conduct business activity, the taxpayer is not entitled to deduct input tax. As a result, the first condition of the analyzed provision is met.

However, the interpretation of the second condition looks interesting. It should be noted that when used in Art. 43 sec. 1 point 10a. b) the VAT Act, the terms "improvement" and "initial value" do not have their own separate definition under the Act on Value Added Tax. As a result, in order to correctly read the meaning of this provision, reference should be made to the act on personal income tax.

According to Art. 22 g of paragraph 1. 17 of the PIT Act, if fixed assets have been improved as a result of reconstruction, extension, reconstruction, adaptation or modernization, the initial value of these funds is increased by the sum of expenses for their improvement, including expenses for the purchase of components or peripheral parts whose unit purchase price exceeds PLN 10,000.

The above provision indicates that, under the tax law, "improvement" is a concept that applies only to assets that are fixed assets. This term should be understood as activities such as reconstruction, extension, reconstruction, adaptation or modernization of a fixed asset, which increase its technical and functional value and adaptation of an asset to be used for a purpose other than its original purpose or giving it other functional features.
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Also, the concept of "initial value" in PIT refers only to fixed assets, not commercial goods. As Art. 22 g of paragraph 1. 1 of the PIT Act: "For the initial value of fixed assets and intangible assets, subject to par. 2-18, it is considered (...) ".

In the light of the above, in a situation where a taxpayer buys real estate from a natural person who does not conduct business activity, and then renovates it, even in the amount of expenditure exceeding 30% of the value, the sale of such real estate will benefit from the described VAT exemption, because we do not have such in the case of dealing with expenditure for the improvement of a building, since the subject of the delivery is not a fixed asset, but commercial goods intended for resale.

A similar position was presented in the individual interpretation of the Director of the Tax Chamber in Katowice of October 20, 2016, No. IBPP1 / 4512-544 / 16-2 / ES:

It should be noted that the Applicant has indicated that he will incur expenses to improve the apartment for renovation purposes up to a maximum amount of 30% of the initial value of the apartment. It should be emphasized, however, that the above-mentioned the premises are commercial goods for the Applicant. Thus, since we are not dealing with a fixed asset, the expenditure incurred by the Applicant on the above-mentioned the premises will not constitute an improvement within the meaning of art. 22 g of paragraph 1. 17 of the Personal Income Tax Act. As already mentioned above, under the tax law, "improvement" is a concept that applies only to assets that are fixed assets.

As a result of the above, the conditions for applying the tax exemption under Art. 43 sec. 1 point 10 of the VAT Act, because the planned delivery of a dwelling will not be made within the framework of the first occupation or within a period shorter than 2 years from the first occupation.