What is capital gains tax on real estate?
Capital gains tax is a tax on the profit, or capital gain, realised upon the sale of real estate. This capital gain is the difference between:
· the sale price
· and the (adjusted) purchase price
For private individuals, the basic rule is that the sale of real estate carried out within the framework of the normal management of private assets is generally not taxable. However, the law provides for a number of clear exceptions.
When is capital gains tax on real estate due?
1. Sale of developed real estate within 5 years
With the sale of developed real estate, such as a house or apartment, within 5 years of acquisition, the capital gain is taxable at a rate of 16.5%, increased by municipal surcharge.
è The period is 3 years from the date of the donation if the property was acquired by way of donation, provided that the sale also takes place within 5 years from the date on which the donor acquired the property.
2. Sale of building land:
Stricter rules apply to undeveloped land:
· sale within 5 years: capital gains tax at 33%
· sale between 5 and 8 years: 16.5%
· sale after 8 years: no capital gains tax
è Here too, a specific period applies in the event of a sale following a donation, namely that capital gains tax may be due if the sale takes place within 3 years of the donation and provided that the sale also occurs within 8 years from the date on which the donor acquired the property.
3. Speculative nature
The capital gain may also be taxed where the tax authorities consider that the sale is of a speculative nature and doesn’t fall within the normal private asset management. In that case, the gain can be taxed as miscellaneous income at 33%.
4. Professional nature
Finally, where the tax authorities consider that the (often successive) sale points to a professional nature, the capital gain may in extreme cases be taxed as professional income, at progressive rates of up to 50%.
How is the capital gain on the sale of real estate calculated?
In principle, the capital gain is calculated as follows:
Capital gain = sale price minus (purchase price + allowable costs)
Step 1: sale price
The sale price is the price stated in the deed of sale, reduced by any legally deductible selling costs.
Step 2: purchase price
The purchase price is the original acquisition value, increased by:
· registration duties
· notarial fees
In the case of donated or inherited real estate, the reference point is the value paid by the donor (!) at the time of their acquisition and therefore not the value used for the calculation of gift tax.
Which costs can be deducted when calculating the capital gain?
Not all costs are deductible but the following are generally accepted:
· notarial fees upon acquisition
· registration duties
· costs relating to the deed of sale
· certain improvement or renovation costs, provided supporting documentation is made available
Maintenance costs or purely repair related expenses are usually not eligible.
If desired, and where the capital gain is taxed as miscellaneous income (sale after 5 or 8 years), it is possible to opt for a flat rate deduction instead of deducting the actual costs, namely:
- a flat rate of 25% of the purchase price, replacing the actual acquisition costs
- a flat rate of 5% per elapsed year, which may be combined with the actual costs of improvements or renovation works in the case of developed real estate
What is the regime for donated buildings and land?
Where real estate has been acquired by way of donation, the same method for calculating the net capital gain applies, with the clarification that the holding period of the donor is also taken into account and may therefore be invoked for the application of any flat rate expense deduction.
Are there exemptions or exceptions to capital gains tax?
Yes. The main exceptions are the following:
1) Sale of the main residence
In principle, the sale of the sole and principal residence is exempt, provided that:
· you effectively occupied the property as your residence
· the transaction is not of a speculative character
2) Normal private asset management
Sales that fall within the normal private asset management and that take place outside the 5- or 8-year period are, in principle, not taxable, even if a profit is realised.
In such cases, the tax authorities must demonstrate either a speculative nature or a professional nature before any taxation can be imposed.
Does a company pay capital gains tax on the sale of real estate?
Yes, but the tax logic is different, as a company is deemed to realise professional income in all circumstances.
When a company sells real estate:
· the capital gain recognised (for accounting purposes) forms part of the taxable profit
· it is taxed through corporate income tax, at the standard rate or the reduced rate where applicable
However, it is possible to offset losses carried forward where applicable. Furthermore, subject to certain conditions it is possible to opt for spreading and reinvestment mechanisms that can temporarily defer the taxation.
What is the difference between capital gains tax for individuals and companies?
How can capital gains tax on real estate be optimised within a company?
Companies can use various optimisation techniques, such as:
· reinvestment of the capital gain
· spreading the tax burden
· correct valuation and depreciation
· careful timing of the sale
A sound prior tax analysis is crucial in this regard.
If you would like assistance with this optimisation, please don’t hesitate to contact one of our offices or our advisory experts.
