In this post, we will introduce you to two aspects related to tax planning when selling or renovating real estate.
In times of global economic and energy crisis, it is of fundamental importance how each person manages their finances as well as their real estate. Record inflation levels in recent times are one of the main reasons many people put their money into buying a home in order to preserve the value of their available funds.The extremely dynamic housing market in terms of prices and their constant growth over the last decade tempts many to buy and sell residential real estate in a short space of time due to the significant price differences reaching up to 50-60% growth within a year or two. It is this dynamic of market processes that makes it possible to make a solid profit from the purchase and sale of real estate. When concluding transactions with real estate for residential needs, we should be informed about what taxes we owe and whether it is possible for the income realized from the sale to be qualified as tax-free in order to maximize the realized profit.
Another aspect that we will introduce you to in this article is whether and what the tax reliefs are for the improvement and/or repair of immovable residential property, as well as the conditions that the natural person should meet in order to take advantage of this opportunity .
Is the income from the sale of residential real estate by an individual taxable?
The Personal Income Tax Act (PITA) determines which income is taxable and which is non-taxable. According to Art. 13, para. 1, item 1, b. “a” from VAT are exempt incomes acquired during the tax year from the sale or exchange of an immovable residential property, if more than 3 years have passed between the date of acquisition and the date of sale or exchange. This means that in order for the income from the sale to be tax-free, it must be the only one for the relevant tax year and the property must have been owned by the alienator for at least three years. When realizing two or more sales of immovable residential property in the period of one tax year, the income received from them will be taxable. In this case, the basis on which ownership of the property was acquired is irrelevant, unless it concerns the acquisition of property by inheritance or testament.
It is important to know that for the needs of the tax legislation and application of the norm of Art. 13, para. 1, item 1, b. “a” under the concept of immovable residential property is understood “immovable property, which at the time of sale or exchange can serve to satisfy housing needs” (paragraph 1, item 51 of the Additional Provisions (DR) of the Income Tax Act). According to judicial practice, “housing needs” can be satisfied by a building that can be a home and be permanently occupied for the needs of one or more persons. Taking this into account, we should pay attention to the fact that the sale of residential property in the stage of completion “rough construction” does not constitute immovable residential property within the meaning of Art. 13 of the Personal Income Tax Act and, accordingly, the income from its sale is not tax-free.
A very important condition is that, in order for the income from the sale of real estate to be tax-free, at least 3 years must have passed from the moment of acquisition to the moment of its sale. In the event that you sell or exchange more than one immovable residential property in the time period of 3 years, you should pay tax, and the taxable income from the sale or exchange of immovable property and limited real rights on such property is defined as the positive difference between the sale price and the cost of acquisition of the property, reduced by 10% of costs (Article 33, Paragraph 1 of the Income Tax Act).
Is the income from the sale of more than one property taxable for the tax year?
According to Art. 13, para. 1, item 1, letter “b” of the Income Tax Act, the income acquired during the tax year from the sale or exchange of up to two immovable properties, as well as agricultural and forest properties, regardless of their number, are not taxable if between the date of acquisition and the date of sale or replacement more than 5 years have passed.
In this hypothesis, the purpose of the real estate is not specified, which means that it can be both residential and commercial, industrial and other needs, such as offices and shops, retail outlets, as well as agricultural land, regulated and unregulated landed property and others.
Another important feature in this hypothesis is the condition that at least 5 years must have passed between the date of acquisition and the date of sale in order for the individual to benefit from the tax-free status of the relevant income.
The conclusion is that for the non-taxability of the income realized from the sale or exchange of real estate, on the one hand, the purpose of the property is important, and on the other hand, the intensity of the transactions carried out for a certain period of time, fixed in the law.
Tax relief for improvements and/or repairs to immovable residential property
The rapid development of the real estate market in our country goes hand in hand with the repairs and improvements that are carried out on newly acquired homes. The renovations in question certainly lead to serious costs for each owner, but the financial burden can be mitigated by the tax relief offered for such activities.
Individuals can benefit from a tax relief in the form of a deduction from the total annual tax base of the payments for labor made during the year in connection with improvements and/or repairs of one immovable residential property in a total amount of up to BGN 2,000, according to Art. 22e, para. 1 of the VAT Act.
For this purpose, however, it is necessary to meet the following cumulative conditions given in the law, namely:
- the real residential property must be located on the territory of the Republic of Bulgaria;
- the taxable person must be the owner or co-owner of the real residential property;
- the improvements and/or repairs must have been carried out by local persons of a member state of the European Union or of another state party to the Agreement on the European Economic Area;
- the real residential property is not included in the enterprise of a person who carries out economic activity as a trader within the meaning of the Commercial Law;
- the taxable person has a document for the paid work in connection with the improvement and/or repair of the residential property, containing the requisites under Art. 6, para. 1 of the Accounting Law, accompanied by a document for its payment (fiscal receipt, receipt, bank or other document);
- the taxable person and the person who carried out the repair are not related persons.
If all these conditions are met, then the individual can benefit from the tax relief. It is important to specify that when the real residential property is owned by more than one natural person, the relief can be used by each co-owner, provided that the total amount of the relief used by all co-owners for the property does not exceed the amount of BGN 2,000 (Art. 22e, para. 3 of the Income Tax Act). Emphasis should also be placed on the condition that the tax relief is available for only one immovable residential property for the tax year.
Conclusion on the non-taxable income from the sale of immovable residential property and the tax relief for improvements and/or repairs thereof
In this article, we have informed you about two specific ways by which you can manage your finances in a flexible and sustainable way in relation to buying and selling and renovating residential real estate. We looked at the possibilities for realizing income from the sale and exchange of real estate, which would be tax-free. Apart from this, we also focused on the tax relief for improvements and/or repairs of immovable residential property, clarifying the conditions under which the individual can benefit from the relief.
The team of the Consulting House “Velinov and Partners” is available for assistance in case of questions related to the subject of this article, as well as for consulting on the entire process of buying and selling real estate, together with all its aspects – tax, property , administrative and others.