Expenditure of the down payment and own housing purpose in PIT

Service-Tax

Natural persons selling real estate are subject to income tax. However, the PIT tax can be avoided by spending the sales revenue for your own housing purposes. Expending the deposit and your own housing purpose, or spending the deposit received before the sale of real estate for your own housing purposes, qualify as an expense entitling you to take advantage of the exemption.

Own housing purposes and tax exemption

The sale of real estate against payment within 5 years from the end of the calendar year in which the real estate was acquired is subject to 19% income tax.

However, as stated in Art. 21 sec. 1 point 131 of the PIT Act, the income from the sale of real estate in the amount corresponding to the product of this income and the share of expenses incurred for own housing purposes in the income from the sale of real estate and property rights against payment is free from tax, if from the date of sale for consideration, not later than in the period of three years from the end of the tax year in which the disposal took place for consideration, the income obtained from the sale of this property or this property right was spent for own housing purposes; documented expenses incurred for these purposes are taken into account up to the amount of income from the sale of real estate and property rights against payment.

Consequently, in a situation where all the income from sale against payment is entirely allocated to housing purposes, then the income obtained on this account will fully benefit from the income tax exemption. On the other hand, if a part of the income obtained from the sale of real estate is allocated for own housing purposes, the tax will be proportionally reduced.

It is also important for what purpose the funds obtained from the sale are spent. According to Art. 21 sec. 25 point 1 of the PIT Act, for the expenses incurred for the purposes referred to in par. 1, paragraph 131, shall be considered expenses incurred on:

  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, a 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 , if in the period referred to in para. 1 paragraph 131, this land will change the use of land for the construction of a residential building;

  4. construction, extension, superstructure, reconstruction or renovation of your own residential building, its part or your own residential premises;

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

- located in a Member State of the European Union or in another country belonging to the European Economic Area or in the Swiss Confederation.

If the taxpayer spends the income obtained from the sale for his own housing purposes, he may take advantage of the tax exemption for the sale of real estate. Therefore, it is important to remember that the entire amount obtained should be allocated to your own housing purposes, as this will result in complete tax exemption.

Advance payment towards the sale price

The institution of a down payment is regulated in Art. 394 of the Civil Code.

In this provision, we can read that the down payment given at the conclusion of the contract means that in the event of failure to perform the contract by one of the parties, the other party may withdraw from the contract without setting an additional period and keep the received down payment, and if it has given it, it may demand the sum twice as high.

In the event of the performance of the contract, the down payment is credited towards the performance of the party that gave it; if the credit is not possible, the down payment is returned.

In the event of termination of the contract, the down payment should be returned, and the obligation to pay a sum twice as high is no longer required. The same applies to the event that the non-performance of the contract was due to circumstances for which neither party is responsible or for which both parties are responsible.

In the context of the problem we are examining, the most important information is that the down payment is payable before the actual sale of the property. In such a case, it is counted towards the selling price.

Expending the down payment and your own housing purpose

Therefore, knowing the provisions regulating the down payment, you should consider whether you can take advantage of the exemption in this respect in the case of spending the down payment for your own housing purposes.

For many years, the case was ambiguous, as the courts issued completely different judgments in this respect. It was problematic to spend the deposit in the context of a fragment of Art. 21 sec. 131 of the PIT Act, which indicates that the funds obtained from the sale shall be allocated starting from the day of sale of the real estate against payment. Meanwhile, taxpayers often spent the down payment for their own housing purpose even before the paid sale.

The case was clarified as a result of the SAC's resolution of February 17, 2020, file ref. act II FPS 4/19.

The court indicated that the amount of the down payment received at the conclusion of a preliminary contract for the sale of real estate against payment and spent for housing purposes benefits from the exemption referred to in Art. 21 sec. 1 point 131 of this Act, if there was then concluded a promised contract transferring the ownership of the real estate, and the amount of the deposit was credited towards the price of its sale.

The above applies not only to the deposit, but also to the advance payment received on account of the price.

In the opinion of the court, the presented provisions make it clear that the income from the sale of real estate should be fully spent only on the date of the final transfer of ownership. The parties to the contract may decide that a part of the purchase price will be transferred to the seller in advance in the form of an advance or other payment under the preliminary sale contract, which will then be credited towards the purchase price at the conclusion of the final contract.

In the light of the above, it can therefore be assumed that if the seller expends a down payment for his own housing purposes and this takes place before the sale of the real estate for a fee, he may take advantage of the exemption in this respect due to his own housing purposes.

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Example 1.

The taxpayer concluded a preliminary sale agreement on March 3, under which he received a down payment of PLN 30,000. The parties agreed that the relevant contract of sale, transferring the ownership, will be concluded on July 1. On June 10, the taxpayer allocated the amount of the advance payment towards his own contribution for the purchase of a new property. Although the payment of the deposit took place before the sale agreement, the amount of PLN 30,000 will be considered an expense for one's own housing purpose. Pursuant to the position of the Supreme Administrative Court expressed in the resolution, the disbursement of the deposit for one's own housing purpose, even if it takes place before the transfer of ownership of the real estate, gives the right to benefit from the tax exemption. Summing up the analysis carried out, it should be noted that due to the existing disputes as to the interpretation of the provisions relating to the disbursement of the advance payment, the Supreme Administrative Court decided to issue a resolution which presents a position favorable to taxpayers.