When do you not have to pay property sales tax? Beware of the new conditions

In today's market, you can earn a decent amount of money by selling real estate. However, this amount is also subject to income tax, which can easily amount to hundreds of thousands of crowns. Fortunately, the law sometimes allows this income to be exempt from tax. We have compiled a list of the conditions you need to meet.

Selling an apartment or house is usually not just a real estate issue, but also a tax issue. In practice, it often turns out that two seemingly similar situations can end up completely differently— one seller does not deal with taxes, the other does.

The difference is not usually in the price of the property, but in details such as the length of ownership, the manner of use, or what you do with the money from the sale. We will help you clarify the basic rules that the law follows.

Main criteria for exemption: residence, time test, and use of money

Taxation of income from the sale of real estate is one of those topics where several factors come into play. It depends not only on whether you are selling an apartment or a family home, but mainly on how long you have owned the property and how you have used it.

These circumstances determine whether you will pay tax on the income from the sale or whether you will be exempt from tax.

For individuals, income tax exemptions are governed by Section 4 of the Income Tax Act. In practice, you are entitled to an exemption if you meet at least one of the following criteria:

It is also important to note that the exemption only applies to properties owned by natural persons. If the apartment or house is part of a company's business assets, a different tax regime applies.

1/ Residence for 2 years: permanent residence stated in your ID card is not sufficient

The first criterion for tax exemption is the length of residence in the property – if you have actually lived in the family house or apartment unit being sold for at least 2 years immediately prior to the sale.

What you should keep in mind:

• Residence ≠ permanent residence. Residence is the place where you actually live – you go home, you have your things there, you sleep there. Simply having your permanent residence registered at the property is not enough.
• For these purposes, the tax office monitors the actual use of the property. Evidence includes energy consumption, internet, insurance, mail, or witness statements from neighbors.
• A recent ruling by the Supreme Administrative Court (NSS) showed that extremely low electricity consumption can be an obstacle to exemption if it does not correspond to normal household operation. The court did not accept the argument that the household mainly used stoves and kerosene lamps and therefore did not grant the exemption.

Therefore, if you are planning to sell a property and are relying on two years of permanent residence, we recommend that you think in advance about objective evidence that you actually lived in the property.

2/ The 5/10-year time test and the connection between the land and the house

The second criterion for exemption is the so-called time test of ownership:

• For properties acquired before December 31, 2020, a five-year time test applies.
• For properties acquired from January 1, 2021, the time test has been extended to 10 years.

The time test usually starts on the day you submit your application for registration of ownership in the land registry and ends on the day of sale. Therefore , if you have owned the property for a sufficient period of time and have passed the 5/10-year test, the income from the sale is not taxed and you do not include it in your tax return at all.

The situation is more complicated for a family home on your own land, but it can also help you significantly:

• If the building is part of the land according to the Civil Code, the date of acquisition of the land is decisive for the time test, not the date of approval of the house.
• Did you acquire the land more than 10 years ago (or before 2021 with a five-year test) and did you obtain the occupancy permit for the house later? If the building is really part of the land, which is advisable to verify in the land registry, the entire income may be exempt from tax when sold, even if you have owned the house itself for a shorter period of time.
• Exceptions are situations where the building remained a separate piece of real estate. In this case, the land and the building are assessed separately, and if the building does not meet the time test, you must pay tax on this part of the income.

3/ Exemption when using money for your own housing

The third criterion applies in a situation where you do not meet the two-year residence requirement or the time test, but you can prove that you will use the money from the sale for your own housing needs – typically to buy another apartment/house, build a house, or purchase land for future construction.

What you should keep in mind:

• The law (mainly Sections 4 and 4b of the Income Tax Act) precisely defines what falls under "own housing needs" – in addition to the purchase of a finished property, this also includes the purchase of land, provided that you start building your own home on it within a certain period of time.
• The exemption only applies to the portion of income that you actually invest in meeting your housing needs. Therefore, if you use only part of the proceeds from the sale to purchase a new house or apartment and keep the rest for other purposes, the unused funds will be taxed at the standard income tax rate.
• You must use the money within the time limits set by law – this usually means that you must use the funds either in the year of sale or in the following tax year, or for expenses in the year prior to the sale; the exact rules are set out in Section 4b of the Income Tax Act and its interpretation.

When is there a risk of a penalty for not reporting exempt income?

The Income Tax Act imposes an obligation to report any income exceeding CZK 5 million, even if this income is exempt from tax. Previously, the rule was that if you wanted to claim an exemption on the basis of housing needs (under Section 4b of the Income Tax Act), you had to report this to the tax office in good time – otherwise you could lose the exemption.

However, as of January 1, 2024, failure to submit a notification does not in itself mean that you will lose your exemption. However, you must still submit the notification by the deadline for filing your tax return, otherwise you may be fined for failing to comply with your notification obligation.

You can send the notification by post or data box, or use the financial administration form Notification of the acquisition of funds that will be or have been used to procure your own housing needs (form no. 25 5259).

What you should keep in mind:

• The reporting obligation applies to all exempt income of natural persons over CZK 5,000,000 – i.e. also gifts, inheritances, sales of securities, etc.
• Exempt income over CZK 5 million must be reported to the tax office by the deadline for filing your tax return for the year in which you received the income.
• Failure to comply with the reporting obligation may result in fines pursuant to Section 38w of the Income Tax Act:
  • 0.1% of the amount of income if you correct the error yourself without being asked to do so,
  • 10% if you submit the notification after being requested to do so,
  • 15% if you fail to comply with the obligation even within the grace period.
• A recent ruling by the Supreme Administrative Court confirmed that ignorance of the law is no excuse. If multiple items are transferred under a single donation agreement, their value is added together for the purposes of the CZK 5 million limit. In this case, a 10% penalty was imposed, which the court did not waive on the grounds that the taxpayer had an obligation to verify their tax liability in view of the amount of income.

Do you need advice on taxes?

We will be happy to calculate the tax impact of your planned sale, check that you meet the time test, and prepare the necessary notifications and personal income tax returns so that you can take advantage of all legal exemptions and avoid unnecessary penalties. Contact our tax specialists using the form below.