PIT housing relief - expenses for own housing purposes part 2

Service-Tax

Some taxpayers collectively carry out a large number of purchase or sale transactions of real estate during the year. They are often unaware of what they can benefit from selling and buying non-commercial real estate. At other times, they have significant problems with identifying expenses for their own housing purposes, which would be covered by the PIT housing allowance. Therefore, it is worth presenting the practical circumstances of applying this specific relief presented below.

Housing relief in PIT - a condition for taking advantage of the relief

A taxpayer who has acquired all or part of the real estate and sells it within 5 years may benefit from the exemption from the obligation to tax the PIT tax for a given sale (in whole or in part), if he spends the funds obtained from it (in part or in full) on the so-called own housing purposes in the period of 3 years counted from the end of the year in which the sale took place.

Expenses for own housing purposes and the PIT housing relief

In art. 21 sec. 25 of the PIT Act, the legislator listed the general types of expenses recognized as incurred for own housing purposes, that is:

  1. purchase of a residential building, its part or a share in such a building, a flat constituting a separate real estate or a share in such premises, as well as for the purchase of land or a share in land or the right of perpetual usufruct of land or a share in such a right related to this building or premises,

  2. acquisition of a cooperative ownership right to a dwelling or a share in such right, the right to a single-family house in a housing cooperative or a share in such right,

  3. purchase of land for the construction of a residential building or a share in such land, the right of perpetual usufruct of such land or a share in such right, including the construction of a residential building, and the acquisition of another land or share in land, the right of perpetual usufruct of land or a share in such right , provided that in the period of 3 years (the period in which the PIT tax relief is applied) the land changes its intended use as land for the construction of a residential building,

  4. construction, expansion, reconstruction, renovation of own building or apartment (or part thereof),

  5. extension, reconstruction or adaptation for residential purposes of your own non-residential building, its part, your own non-residential premises or your own non-residential premises

- located in an EU Member State or in another country belonging to the European Economic Area or in the Swiss Confederation.

It is worth adding here that from January 2019, a new regulation regarding how the PIT housing allowance is applied has appeared, which says that the expenditure on real estate included in points a, b, c will be classified as expenses for own housing purposes, if the subject - acquired real estate is purchased for ownership within 3 years from the end of the year in which the real estate was sold.

With regard to the expenses mentioned by the legislator and included in points d and e, it should be emphasized that the following should be understood by own building, premises or non-residential room:

  1. a building, premises or room owned or jointly owned by the taxpayer or to which the taxpayer has a cooperative ownership right to the premises, the right to a single-family house in a housing cooperative or participation in such rights,

  2. a building, premises or room not constituting ownership or co-ownership of the taxpayer, if within 3 years (PIT housing relief will be applied) the taxpayer acquires their ownership or co-ownership or cooperative ownership right to the premises, the right to a single-family house in a housing cooperative or participation in such rights, if he was not previously entitled to such a right.

Other expenses deemed to be incurred for own housing purposes

In addition to the above-mentioned expenses, there are also other expenses deemed to be intended for own housing purposes, namely

  1. expenses incurred for:
    1. repayment of the loan (loan) with interest, taken by the taxpayer before the day of obtaining income from sale for the purchase of an apartment or house, land, construction of a new house, extension, renovation, adaptation or reconstruction of an existing, own apartment,
    2. repayment of each subsequent loan (loan) with interest taken by the taxpayer before the date of obtaining income from disposal against payment for the repayment of the loan (loan) mentioned in point a,
    3. repayment of each subsequent loan (loan) and interest on that loan (loan) taken by the taxpayer before the date of obtaining income for disposal against payment, for the repayment of the loan (loan) referred to in point (a). a or b

- at a bank or a cooperative savings and credit union with headquarters in a Member State of the European Union or in another country belonging to the European Economic Area or in the Swiss Confederation,

  1. the value of received for consideration sale by exchange located in a Member State of the European Union or in another country belonging to the European Economic Area or in the Swiss Confederation:

    1. a residential building, its part or share in such a building, residential premises constituting a separate real estate or share in such premises, or
    2. a cooperative ownership right to a dwelling, the right to a single-family house in a housing cooperative, or a share in these rights, or
    3. land or a share in land, a perpetual usufruct right to land or a share in such a right intended for the construction of a residential building, including land or a share in land or a right of perpetual usufruct of land or a share in such a right with the construction of a residential building already commenced, or
    4. land, a share in land or the right of perpetual usufruct of land or a share in such right, related to the building or premises listed in point a.

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Expenses not considered as spent on own housing

In art. 21 sec. 28 of the PIT Act, one can observe the provisions of the Act in which the legislator does not consider expenditure considered as spent for own housing purposes:

  1. purchase of land or a share in land, perpetual usufruct right to land or a share in such right, a building, its part or a share in a building,

  2. construction, extension, superstructure, reconstruction, adaptation or renovation of a building or part thereof

- if these expenses are for purchase for recreational purposes.

Example 1.

The taxpayer and his wife acquired an apartment as part of a community of property (agreement to establish separate ownership of the premises in the form of a notarial deed), which was handed over to them in October 2016. From that date, the spouses completed the apartment's finishing enabling the use of the premises (water and sewage system, sanitary, electric and gas installations). In May 2020, the spouses sold the apartment, but before its sale, i.e. in March 2020, they took out a second loan to buy a single-family house. They used part of the amount from the sale of the flat to pay off the loan they had taken for the purchase of the house. The taxpayer wonders whether the repayment of the new loan will be an expense for housing purpose? What about the expenses for adapting to the use of the previous apartment?

The taxpayer and the spouse will not be able to count as the costs of the sale of the flat (and thus reduce the taxable income) of the costs incurred for adapting a given flat from the developer state to the condition enabling the use of the premises, because the funds for this renovation do not come from the sale of the flat.

Example 2.

In 2019, the taxpayer inherited an apartment. In 2020, he sold it and the funds obtained from this transaction were allocated to the purchase of paving stones for the sidewalk next to the house in which he currently lives. The sidewalk is structurally not related to the building. The taxpayer has doubts whether he can consider this expenditure as incurred for his own housing purpose?

Unfortunately not. The purchase of paving stones for the pavement will not be considered an expense for housing purpose. In this case, it should be noted that in the case of expenditure on sale for renovation, construction, extension, reconstruction, the object of allocating the cost is a building or a dwelling, while the pavement in this case is not structurally related to this building.

Example 3.

In January 2018, the taxpayer purchased a land property by way of a donation, and then sold it after a few months in the same year. Since 2010, he and his wife have been living in the Netherlands, where he is a tax resident there. In 2015, the taxpayer took out a mortgage there to purchase a single-family house in which he lives to this day, also located in the Netherlands (also in 2015, the taxpayer obtained ownership of the house). The taxpayer has doubts whether the income obtained from the sale of land and intended for the payment of a mortgage relating to a house located in the Netherlands, in which the taxpayer resides and will continue (taken before the sale of the land) will be an expense for his own housing purposes?

In this case, yes. Pursuant to Art. 21 sec. 25 of the PIT Act, the expenditure on the purchase of a house or a dwelling, in whole or in part, may relate to real estate located in an EU Member State or in another country belonging to the European Economic Area or in the Swiss Confederation.

Example 4.

In December 2018, the taxpayer received undeveloped land by inheritance. In 2016, he and his wife took a mortgage loan for the construction of a single-family house, which was put into use in 2017. In July 2018, the taxpayer started a business consisting of periodic short-term rental of two rooms in the house, representing 17% of its usable area . On the other hand, in 2019, the taxpayer sold his land property and is currently wondering whether the funds from this sale will be used to pay off the mortgage loan as expenses for his own housing purpose?

When analyzing this case, it should be emphasized that the purpose of taking a mortgage in 2016 by the taxpayer and his spouse was to build a single-family house. Thus, the use of funds from the subsequent sale of land for the repayment of a given loan will qualify as expenditure for own housing purpose, despite the temporary later use of two rooms of the house for short-term rental.