What changes to the taxation of rental await taxpayers in 2023?
Starting from 2023, there will be significant changes for taxpayers renting real estates.
Firstly, the tax settlement of income obtained from ‘private rental’ (i.e. rental outside of business activity) will be possible only in one form, i.e. landlords will be required to pay a lump-sum tax on registered revenues. After the changes, taxpayers will not be able to choose taxation according to general rules (tax scale).
Furthermore, from 2023 it will no longer be possible to apply tax-deductible depreciation write-offs with regard to residential real estates, including those used for business rental.
Obligatory taxation of private rental revenues with a lump-sum
Lump-sum tax rates amount to: a) 8.5% - relating to the revenue amounting up to PLN 100.000 and b) 12.5% - for the surplus over PLN 100,000. Despite quite low taxation rates, the lump-sum taxation will not be profitable for taxpayers with high expenses. This form of tax settlement does not allow to deduct tax costs. The tax base is the entire revenue. As a result, within lump-sum taxation taxpayers will not be able to settle e.g. renovation costs, furnishing costs, interests on mortgage loan, depreciation write-offs or utility charges (i.e. payments for electricity, water, garbage collection, etc.).
Inability to deduct costs is especially relevant in the context of the reimbursement of utility charges by a tenant to a landlord. There is a risk that such reimbursements may be treated by the tax authorities as income subject to taxation. In this regard, it is important to verify rental agreements and include in them provisions clearly stating that it is a tenant who is obliged to bear the cost of utility charges. The same applies to property maintenance fees paid to housing community/cooperative. Such provisions will help to defend the tax position of the landlord who re-invoices the above payments to tenants. Otherwise, they may be obliged to pay tax on the refunded charges/fees, at the same time not being able to settle them as tax costs.
As regards taxpayers who are renting several real estates, it may be a good idea to consider starting a business in this field. Rental income obtained within business activity allows to choose tax settlements according to a tax scale (12% / 32%) or a flat-rate tax (19%). Both of these forms enable to recognize expenses related to the rental as tax-deductible costs. It is not however a simple choice and many factors should be taken into consideration. For example, starting the rental business would entail the obligation to pay social security and health insurance contributions on this account.
Renting residential apartments will be less profitable
As of 2023, it will no longer be possible to include in tax costs the depreciation write-offs related to residential buildings or apartments. It also applies to real estates, which are the subject of rental within business activity. It is a significant blow for those investors, who took into account the tax depreciation possibility when making decision to buy a real estate for rental.
As a result of the ban, the tax settlement of the expenses incurred for the acquisition of residential real estate will be possible only if the real estate is sold and taxable income occurs. In this regard it should be noted that the sale of residential real estate does not always result in taxation. If a landlord is a natural person and the sale of residential premises takes place after 5 years from the end of the calendar year, in which the real estate was purchased, then, as a rule, there is no obligation to tax the income arising from this sale. Therefore, in such a case the possibility of settling the purchase price in the tax costs will be lost (somewhat different rules apply when selling the real estate that has been withdrew from business activity.)
What’s important, the effects of the depreciation ban apply not only to the purchase price of residential apartment / building, but also to other expenses related to the purchase, that are included in the ‘initial value’ of fixed asset, e.g. notarial fees or loan interests incurred before real estate was placed into use.
New regulations affect as well possibility to settle expenses for the renovation of residential buildings/apartments. In principle, taxpayers will still be able to include in tax costs all types of repairs of broken elements. However, if the expenses for the renovation: a) increase utility value of the real estate - by modernizing, expanding or adapting it to perform new functions, and b) exceed PLN 10,000 in a given year, then, the taxpayer will not be entitled to include them directly in tax costs. This type of expenses is qualified as 'fixed asset improvement' expenses, which for tax purposes are treated similarly to the purchase price (they may be settled with the potential sales income).
It should be noted as well that the provisions prohibiting tax depreciation of residential real estates have been very controversial from the very beginning. There are allegations that they violate the constitutional principle relating to the protection of acquired rights, since the ban is also applicable to real estates purchased before introduction of the ban. However, these reservations are not addressed by tax authorities or administrative courts, which claim that they are not authorized to comment on the constitutionality of provisions.