Purchase of land for construction purposes and tax deductible costs

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Investment activity in the field of construction is one of the very common areas of business activity of entrepreneurs. Taxpayers incur considerable expenses in connection with the purchase of real estate or materials and services needed to build buildings. Therefore, the question arises how to account for expenses for the purchase of land for construction purposes in the tax costs of economic activity. In the article below, we will comprehensively present the principles of including all real estate investments as tax deductible costs.

Land is not depreciated

Entrepreneurs deciding to purchase land must remember that pursuant to Art. 22c of the PIT Act, fixed assets in the form of land are not depreciated. As a result, although the purchased plot should be entered in the register of fixed assets, it cannot be depreciated against its value. Moreover, entrepreneurs should also bear in mind the fact that land acquisition expenses are not a one-off tax deductible cost at the time of acquisition.

So how to include the cost of land purchase in the tax settlement? Well, pursuant to Art. 23 sec. 1 point 1 of the PIT Act, expenditure on the purchase of land is a tax cost at the time of the sale of this asset for consideration.

Example 1.

In 2016, the entrepreneur purchased the land for the amount of PLN 200,000. It was not allowed to make depreciation on this expense, and the expense was not recognized as an expense at the time of purchase. In 2018, the entrepreneur sold the land for PLN 300,000. At the time of sale, the proceeds from the sale of the land will be reduced by the purchase cost, which means that the tax will be paid from the amount of PLN 100,000.

Therefore, as can be seen from the above regulations, the costs of land acquisition are not considered tax deductible costs, what is more, land, although it is a fixed asset of the taxpayer, is not depreciated. The entrepreneur will not be able to make depreciation write-offs from the initial value of the land and include them as tax costs. Pursuant to the Act, however, they must be included in the fixed assets register.

Similarly, any expenses directly related to the purchase of land, such as notary fees or court fees, are not tax deductible. Expenses for the purchase of land and all expenses directly related to the purchase become a tax deductible only at the time of sale of the property for consideration. This means that only the sale of land makes it possible to recognize the expenses for its purchase in tax costs. This also applies to the aforementioned expenses accompanying the acquisition (commission, court fees, etc.) not recognized at the time of the land acquisition, as they increase the initial value of the land and therefore will become a deductible at the time of sale of the land. It is not possible to recognize these expenses at the time of purchase or through depreciation.

Loan-financed land purchase

Often, entrepreneurs do not have enough funds to buy land and have to use bank loans or loans. As a rule, the amount of capital is not a cost. Only the interest on the loan taken out to finance the land purchase transaction may be tax-deductible.At this point, however, it should be remembered that only the interest accrued and paid after the date of entering the land into the fixed assets register is included in the costs. Interest paid before the land is put into use increases its initial value. Interest paid before the land is entered in the fixed assets register increases the initial value of the land and thus becomes an expense when it is sold.

The above results from the wording of Art. 21 sec. 1 point 33 of the PIT Act, which states that interest, commissions and exchange rate differences on loans (credits) increasing the investment costs during the implementation of these investments are not included in the tax deductible costs.

In addition, confirmation of the above position can be found, for example, in the individual interpretation of the Director of the Tax Chamber in Bydgoszcz of 31.01.2008, ITPB1 / 415-586 / 07 / DP:

Taking the above into account, it should be stated that the interest accrued until the land is commissioned for use as a fixed asset cannot be classified directly as tax deductible costs, but may increase its initial value. According to the content of Art. 22 g of paragraph 1. 3 of the above-mentioned act, the purchase price is the amount due to the vendor, increased by the costs related to the purchase accrued until the date of transferring the fixed asset or intangible value for use, in particular the costs of transport, loading and unloading, insurance by way of, assembly, installation and launching computer programs and systems, notary fees, fiscal and other fees, interest, commissions, and less tax on goods and services, except where, in accordance with separate provisions, tax on goods and services is not input tax, or the taxpayer is not entitled to reduction of the amount of tax due by input tax, or refund of the tax difference within the meaning of the Act on tax on goods and services. In the case of import, the purchase price includes customs duty and excise duty on the import of assets. (...) In connection with the above, it should be stated that the interest on the loan for the purchase of land accrued until the date of commissioning the fixed asset for use and the fees related to the purchase of land will increase the initial value of this fixed asset, while the interest accrued and paid and other costs incurred after that date, they can be classified as tax deductible costs.

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Example 2.

In order to purchase a construction plot, the entrepreneur took out a bank loan in November 2017. The land was purchased and then put into use on January 1, 2018. As a result, interest on the loan paid before that date increases the initial value of the fixed asset, while any interest paid after that date can be recognized directly as tax deductible.