Abolition of joint ownership in the light of taxes

Service-Tax

Joint ownership of one thing is the most common phenomenon in relation to real estate. However, the interests of the parties are not always so compatible that the state of joint ownership could last permanently. In this case, it is necessary to terminate the joint ownership. We write about the effects of such an activity when the joint owners are entrepreneurs in the following article

What is the dissolution of joint ownership?

The joint ownership itself and the manner of its abolition are institutions of the Civil Code. Following the code regulations, it should be pointed out that joint ownership consists in the fact that the ownership of the same thing is wholly owned by several people. As for the abolition of joint ownership, it essentially aims at a new shaping of property ownership. The regulations indicate that each of the co-owners may at any time demand the abolition of co-ownership. The abolition of joint ownership is understood as the liquidation of the legal relationship between the joint owners, which takes place by way of an agreement or a court decision.

The very abolition of joint ownership may take place by dividing the joint thing, and when the thing cannot be divided, by granting the thing to one of the co-owners with the obligation to repay the remaining ones or by a civil division consisting in the sale of the joint thing and the division of the price obtained according to the size of the joint owners' shares.

It follows from the above that the dissolution of joint ownership may take place by dividing the things between the partners or by awarding the whole thing to one of them with the obligation to repay the others.

Abolition of joint ownership in the light of PIT

The choice of one of the methods presented above will have different effects in terms of income tax. If there is a physical division of things between the co-owners, each of them will receive his share. Consequently, it will not cause any gain that could be considered tax revenue. The situation is different when, as a result of the abolition of joint ownership, the whole thing is granted to one person, with the simultaneous obligation to make repayments to the other joint owners.

Then it is assumed that the person receiving the whole thing in its entirety acquires a share in it in excess of the share held and entitled to it in this thing so far. The consequence of this is the sale of a share in it on the part of the co-owner, who in return of his share in the goods will receive a financial repayment. Then we are dealing with the sale of a share in real estate against payment, which is classified as a source of income. The term "disposal for consideration" applies to all transfers of ownership, not limited to a sale or exchange, but applies to all legal transactions that transfer ownership of an item.

Example 1.

Three entrepreneurs are the owners of one real estate, 1/3 each. They decided to abolish co-ownership by physically dividing things up and separating for each of them a plot of land corresponding to the size of the share held. In this case, there will be no taxable income.

Example 2.

The owners of one real estate, 1/3 each, are three entrepreneurs A, B and C. They decided to abolish the joint ownership by granting the entire property to entrepreneur A, who undertook to repay B and C in the amount of PLN 50,000 each. In such a case, the dissolution of the joint ownership of the real estate is treated as the disposal of the share against payment by the party receiving the repayment. As a result, entrepreneurs B and C should recognize income from disposal of an asset for consideration in the amount of PLN 50,000 each.

The above position was confirmed by the Director of the Tax Chamber in Katowice in the interpretation of 28 April 2014, No. IBPBII / 2 / 415-83 / 14 / ŁCz, where you can read: As can be seen from the above, one of the ways of abolishing joint ownership is granting a common thing to one of the joint owners with the obligation to repay the others. This means that people who receive repayments in exchange for shares in joint ownership sell their shares for a consideration. Therefore, a tax obligation arises on the side of the person making the sale of a share in the property for a consideration (in return for the repayment).

Abolition of joint ownership in the light of VAT

The considerations presented so far are reflected in the field of value added tax. VAT is subject to, inter alia, paid delivery of goods. It does not follow from the provisions of the VAT Act that the payment for the delivery of goods must be in cash. Payment as a consideration may also take the form of material or mixed - payment in part in cash, and in part in kind.Therefore, for an activity to be considered for pecuniary interest, it is sufficient for it to be possible to determine the price expressed in money in relation to the consideration constituting remuneration for this activity.

From the above, it can be concluded that only events that are for pecuniary interest are subject to VAT, however, the payment itself should be understood broadly. Therefore, if the dissolution of joint ownership takes place free of charge, which is understood as the physical division of things and the lack of payment, and then there is a material separation of shares in the property in question, which correspond in terms of value and size exactly to the current fractional share of the parties in the joint ownership of the property, then the activity this one is not subject to VAT.