Land purchase - accounting and tax aspects
Entrepreneurs often purchase various types of land on which, for example, they plan to start building a new company headquarters. In this case, the question arises whether the expenses on this account can be classified as tax costs and whether the tax should be paid on this transaction to the tax office.
Land purchase and tax deductible costs
Pursuant to Art. 23 sec. 1 of the Personal Income Tax Act, expenses incurred for the acquisition of land or the right of perpetual usufruct of land, with the exception of fees for perpetual usufruct of land, shall not be recognized as tax deductible costs. Moreover, Art. 22c of the act regulates that land is not subject to depreciation. Pursuant to the Act, however, they must be included in the fixed assets register.
Any expenses directly related to the purchase of land, such as notary fees or court fees, are not tax deductible. These expenses increase the initial value of the land and become a cost when selling the land.
Tax deductible costs include only interest on the loan taken out to finance the land purchase transaction. The condition for such credit is the existence of a relationship between the land and the business activity conducted. This means that the purchase must be made by the business owner. It is worth remembering that costs include only the interest accrued and paid after the date of entering the land into the Fixed Assets Register. Interest paid before the land is put into use increases its initial value.
Pursuant to Art. 86 sec. 1 of the VAT Act, to the extent that goods and services are used to perform taxable activities, the taxpayer has the right to reduce the amount of tax due by the amount of input tax. On the basis of this provision, it is stated that if the purchase of land is a VAT-taxable activity, it is possible to deduct VAT on that purchase. The tax can also be deducted from other expenses related to the purchase of land, provided that their incurring is documented with appropriate invoices.
When the taxpayer decides to sell the land, the amount of revenue will be the disposal value less VAT. Taxable income is reduced by all costs that were incurred during the purchase of land, i.e. all fees and interest on the loan for the purchase of land, calculated before the land was entered into the fixed assets register. In this case, these expenses will constitute tax deductible costs.