When is tax due on elimination of joint ownership of real estate?
Elimination of joint ownership is not always tax-neutral. This should be taken into consideration when deciding how to conduct the transaction.
Generally, under the Polish Civil Code (Art. 211 and 212), elimination of joint ownership of real estate may take one of three forms: physical partition of the property, sale of the property, or awarding the property to one of the existing co-owners (with or without the obligation to pay off the other co-owners).
Elimination of joint ownership of real estate is not always tax-neutral. The way the transaction is structured affects the amount and type of tax. Therefore the tax aspects of the transaction should be considered before taking legal steps. The form of elimination of joint ownership of real estate most often encountered in practice is to award the property to one of the co-owners (with or without a requirement to pay off the other co-owners), and thus we focus below on the main tax consequences of that structure.
Civil transaction tax
An agreement on elimination of joint ownership of real estate with a payment to the other co-owners is subject to civil transaction tax at the rate of 2%. The basis for calculation of the tax in this case is the market value of the share in the property acquired, beyond the existing share the acquirer already holds in the joint ownership—in other words, in practice, the value of the payment made to the other co-owners (assuming that it reflects the market value), not the value of the entire property (Supreme Administrative Court judgment of 12 October 2016, Case II FSK 2718/14). The taxpayer is the co-owner who acquires a share in the real estate beyond his existing share in the joint ownership (i.e. the joint owner buying out the other joint owners). As elimination of joint ownership of real estate requires the form of a notarial deed, this tax is collected by the notary.
Three sisters jointly own real estate with a value of PLN 1.5 million (each with a one-third share). They decide to eliminate the joint ownership by awarding the entire property to one of the sisters, who will pay each of the other two sisters PLN 500,000 cash for their respective shares. The civil transaction tax on this transaction will be PLN 20,000.
Estate and gift tax
It may also happen that under the agreement on elimination of joint ownership, the real estate is awarded to one of the co-owners without a payment to the other co-owners. In this case of elimination of co-ownership without consideration (the other co-owners transfer their shares without receiving payment), the transaction is not subject to civil transaction tax. It may be subject to estate and gift tax, however. The amount of the tax or a possible exemption depends on the degree of kinship between the co-owners.
A property worth PLN 1.5 million is jointly owned by Maria, her sister Danuta, and Danuta’s daughter Aneta. They decide to eliminate joint ownership of the property by awarding it to Aneta, without any payment to Danuta or Maria.
Danuta, as Aneta’s mother, is in tax group 0 for purposes of estate and gift tax. This means that the elimination of co-ownership without consideration (with respect to the share that was held by Danuta) will be exempt from estate and gift tax, so long as the relevant tax return claiming the exemption is filed with the tax authorities within 6 months after conclusion of the agreement. But in relation to Aneta, her aunt Maria falls within tax group 2. This means that Aneta will be required to pay estate and gift tax on the transaction with respect to the share in the property held by Maria. This is a progressive tax, with rates for tax group 2 of 7%, 9% and 12%, and in this case would be PLN 59,178.
Personal income tax
Elimination of joint ownership of real estate where the property is awarded to one of the existing co-owners with an obligation to pay off the other co-owners may give rise to an obligation to pay personal income tax on the part of the persons receiving the payment.
For PIT purposes, this transaction is a sale for consideration if it occurs within 5 years after the end of the tax year in which the property was acquired. The tax rate is 19%.
The tax consequences of elimination of joint ownership of real estate discussed above are of a general nature and apply to a situation where the real estate is the private property of individuals (i.e. is not used for conducting economic activity).
Anna Zięba, Jakub Świetlicki vel Węgorek, Tax practice, Wardyński & Partners