Real estate under censorship

Małgorzata Dankowska, Partner, Tax Advisor | 14 września 2021

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The “Polish Deal” anticipates a number of changes that will affect the real estate industry. Here are the most important ones.

Elimination of the possibility of taxing income from the so-called private lease in accordance with general tax scale rules

All taxpayers earning income in this respect will apply the same principles of taxation of such income. The income will be taxed exclusively by means of a lump-sum tax on registered income. This means that taxpayers will not be able to recognize the tax costs of renovations, costs related to the purchase of apartments, retrofitting of apartments etc. The tax will depend solely on the amount of revenues from rent.

Will this mean a decrease in the quality of apartments offered for rent? Time will tell. However, the rental price is largely dependent on the location of the property, the decor and quality of materials is an additional advantage. It’s hard to resist the temptation to save on costs when tax depends solely on revenues. Let us hope that the times of apartments with great-grandmother’s furniture do not return to grace.

Elimination of the possibility of depreciating residential real estate

The prohibition is independent of the source of income and the entity that owns the residential property. As a palliative measure, taxpayers have been given the option of not recording these assets in the fixed asset register, although this change may, in practice, make it more difficult to determine the cost of real estate acquisition at the time of its future sale.

This change will undoubtedly hit the Build-to-Rent sector and institutional rental housing projects, affecting their profitability.

Limitation on depreciation write-offs in real estate companies

In addition to the above restriction on residential property, it is also worth remembering the proposal to conduct an additional condition on depreciation of other types of property. The amendment binds the amount of tax deductions to accounting deductions, somewhat forgetting that investment properties are often valued in the fair value model. This means that in accounting terms they are not depreciated, but valued at the balance sheet date. Does this then mean that depreciation is prohibited for tax purposes? The literal wording of the condition seems to indicate so.

Other tax restrictions already in place that affect the industry:

– additional reporting requirements for real estate companies

– necessity to appoint a tax representative for selected entities

– role of the real estate companies’ payer when taxing their sales

– Minimum tax on real estate.