Although there is often talk of a high tax burden in the Czech Republic, the situation is different for real estate investors. The Czech tax system offers a number of mechanisms that make it possible to significantly reduce the tax liability, quite legally. Instead of general statements, we will show a specific case that clearly demonstrates how a real estate investor can earn tens of millions without having to pay high taxes.
Example: Prague IT specialist and his ten-year investment in an apartment
Let's imagine an IT specialist in Prague who has an annual income of CZK 2 million and decides to invest in an apartment worth CZK 15 million. The apartment will be purchased on a mortgage with a loan of CZK 12 million (LTV 80%) with an interest rate of 3%. Interest on the loan amounts to about CZK 350,000 per year. He rents the apartment for CZK 30,000 per month, which means an annual rental income of CZK 360,000. At first glance, it may seem that he will pay tax on rental income, but the reality is different.
Tax spells: Depreciation, interest and reducing the tax base
The basis of successful tax optimization for real estate is the correct use of depreciation. Instead of a linear write-off over 30 years, where the same amount is deducted each year, the investor can choose to accelerated write-off. This mechanism allows you to apply higher costs in the first years of holding the property. In our example, in the first year of depreciation, an IT specialist can count almost CZK 1 million in expenses, which will significantly reduce his tax base.
It can also include in the cost mortgage interest on an investment property, which reduces its tax liability on rental income even further. Ultimately, even if an IT specialist has rental income, he pays minimal or even no tax on rental income thanks to depreciation and mortgage interest.
What is particularly advantageous is the possibility of claiming a tax loss. If the rental loss is greater than the income, this negative tax base can be used against other income. In the case of our IT specialist, this would mean that he can reduce part of his income from doing business as a self-employed person by the loss generated by investment properties.
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Sales net of tax and accumulation of assets
After 10 years of holding the property, the value of the Prague apartment increased from CZK 15 million to CZK 24.4 million (at a conservative annual appreciation of 5%). Over the course of 10 years, he earned a rental income of CZK 3.6 million.
Oh, thanks time test for the sale of real estate, which in the Czech Republic is fixed for 10 years, an IT specialist can sell his apartment completely without paying income tax. The total profit from the sale (CZK 9.4 million) will remain untaxed.
Total balance after 10 years:
- Income from work (self-employed): 20 million CZK
- Income from rent: CZK 3.6 million
- Profit from the sale of the apartment: 9.4 million CZK
- Total revenue: 33 million CZK
- Total taxes paid: 1.8 million CZK (social and health insurance only). The effective tax rate is so just 5.4%, which is an extremely low figure in developed countries.
Conclusion: How to use the tax system to your advantage
The example of an IT specialist clearly demonstrates that with a little knowledge and proper planning, property can be built in the Czech Republic with minimal tax burden. However, it is important to note that these are not tax scams, but legal and standard mechanisms offered by the Czech tax system. This system is set up to encourage real estate investment while motivating people to do business. Therefore, the most important thing is to have an overview and not be afraid to use all the available tools that the legislation provides you.
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