Tax on the Sale of an Apartment: When the Seller Pays and When Not

· · Tips for Sellers

Before selling, many owners worry about one item that is hard to estimate: tax. In most cases, tax on the sale of an apartment is not payable at all. Still, there are situations in which the Tax Administration determines a liability, and the decision can arrive when the seller least expects it.

That is why it is good to know the rules before you list a property or sign a preliminary contract. Below we explain the basics, how the tax is calculated and which documents are worth keeping. This text is of a general nature and does not replace the advice of a tax professional.

Tax on the Sale of an Apartment: When It Is Not Payable

The official tax name of this obligation is income tax on the disposal of real estate. Disposal includes sale, exchange and other transfers of ownership.

According to the Tax Administration's explanation, income from disposal is not taxed if the property is disposed of after two years have passed from the date of acquisition. The date of acquisition is considered to be the date of the purchase agreement.

So if you bought the apartment more than two years ago and do not fall under the exceptions described below, income tax generally does not apply.

Professional literature also states that income from the disposal of a single property is not taxed if it served as the residence of the taxpayer or members of their immediate family. The details depend on the specific case. Check them with a tax adviser or at the competent branch office of the Tax Administration.

When Tax Does Apply

The obligation most often arises in the following situations:

  • sale before two years have passed since the property was acquired,
  • sale of more than three properties of the same type within five years of their acquisition,
  • property acquired as a gift and sold within two years of the moment the donor acquired it.

The first case most often affects those who buy an apartment as a short-term investment and resell it quickly. The second concerns owners who trade in real estate more frequently, since such activity is treated for tax purposes as regular business.

How the Tax Is Calculated and Who Determines It

The tax base is the difference between the market value of the property and its acquisition value. The acquisition value is increased by the growth in producer prices of industrial products. According to available interpretations, investment and disposal costs may also be recognised, but only with credible supporting documents.

On its website, the Tax Administration states that capital gains from the sale of real estate are taxed at a rate of 24%. Rates change over time, so check the current amount before selling.

The tax is not calculated in the annual tax return. It is paid according to the Tax Administration's decision, generally within 15 days of delivery of the decision.

It is also important that the market value is taken as the income received. If the price in the contract does not correspond to the market price, the Tax Administration may determine the income based on market prices in the place where the property is located. An unrealistically low contract price is therefore not a good way to save. A professional valuation helps ensure the price in the contract is defensible.

Documents Worth Keeping

Even if you believe tax does not apply, well-kept documentation saves stress and money if an inquiry arrives. Keep:

  • the purchase agreement showing the date and price of acquisition,
  • invoices and contracts for renovations and investments in the apartment,
  • proof of selling costs, for example the agency commission,
  • proof of residence in the property, for example a certificate of residence,
  • a market valuation, if you have commissioned one.

Invoices for works are often the hardest to find after several years. That is why you should put them into a single folder, paper or digital, right after the renovation.

Income Tax Is Not the Only Tax in the Picture

Income tax on disposal should not be confused with real estate transfer tax. Its taxpayer is generally the buyer, except where VAT is charged on the acquisition. Having paid income tax does not exclude the obligation to pay real estate transfer tax.

Separately, there is also a local property tax, regulated by municipalities and cities. Each of these taxes has its own rules and deadlines, so consider them separately when planning a sale.

Conclusion

Before selling, check three things: the date of purchase, how you acquired the apartment and how many properties you have sold in the last five years. The answers will show whether there is cause for concern. If you fall under any of the exceptions, it is better to prepare the calculation and documentation in advance than to be surprised by a decision.

If you are planning to sell in Zagreb, Split, Zadar or Pula, the agents at Imperium Immobiliare will gladly guide you through the steps of the sale, from valuation to preparing the documentation. For a specific tax calculation, we also recommend advice from a tax professional.

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