Sale of a Gifted Property: Where People Most Often Pay Unnecessary Tax

Ing. Viktória Horáčiková
Tax Advisor

Gifting property within a family may look simple and “safe” at first glance. After all, a gift isn’t taxed. The problem often doesn’t arise at the moment of gifting, but several years later – when the property is sold. And that’s when many people discover that the tax liability can be significantly higher than they expected.

Gifting ≠ a tax problem. Selling is.

Receiving a property as a gift is not subject to income tax. The recipient does not file a tax return just because they obtained an apartment or house as a gift. Tax questions arise, however, at the moment they decide to sell the property.

The sale of real estate by an individual is generally taxable income, unless the conditions for exemption are met.

Five years that can mean thousands of euros

The key concept is the five-year time test. If the recipient sells the property before five years have passed since acquiring it, the income from the sale is subject to income tax – and also to health insurance contributions.

Important notice: When a property is gifted, the donor’s holding period does not count. This is a common mistake. Even if a parent owned the property for 20 years, the five-year period starts from zero for the recipient, i.e., from the day the property was acquired by gift.

Why the tax can be unnecessarily high

If the sale proceeds are not exempt, the amount of tax depends on what tax-deductible expenses can be claimed. And this is where major differences arise:

• sometimes, the expense is the donor’s original acquisition cost
  • other times, it is possible to use the expert valuation as of the gifting date, which is often significantly higher
  • one crucial detail decides this – whether the sale would have been tax-exempt for the donor on the day of gifting or not

Poorly timed or improperly structured gifting can therefore mean that tax is calculated from a much higher base than necessary.

Planning that pays off

In practice, it often applies that:

• if the donor has owned the property for more than five years and the recipient plans to sell it soon, it may be more tax-efficient for the donor to sell it first and then gift the money
  • or the gifting can be timed correctly so that a higher expert valuation can be used as an expense

Why it makes sense to consult in advance

It’s true that in simple, “textbook” cases, an ordinary person can assess the basic question – whether the sale of the property is tax-exempt. But life often brings situations that are significantly more complex from a tax perspective: combinations of gifting and inheritance, property included in business assets, co-ownership shares, or several linked transfers within a short period of time.

In such cases, an incorrect assessment can lead to unnecessary tax liability or errors in the tax return.

An experienced tax advisor can, even before gifting or before selling:

• assess whether the transaction is truly tax-exempt, including in less typical situations
  • propose a more tax-efficient approach for both the donor and the recipient
  • minimize income tax and health insurance contributions in a fully legal way

Conclusion

Gifting property is a sensitive family matter, but also a significant tax transaction. Proper timing and professional assessment can determine whether you pay tax unnecessarily – or not at all.

If you are considering gifting or selling a property, consulting a tax advisor in advance is one of the best investments you can make. If the topic of gifting property doesn’t apply to you, you might be interested in this article about tax optimization.

The above information on this website is intended to give you a basic overview of tax, accounting and legal regulations. It is in no way intended as a guide to their application in practice, which may differ significantly from the legislation in force at any given time. The information on this website does not guarantee legal, accounting, tax or other professional advice or services. As such, the information should not be taken as a substitute for professional consultation with accounting, tax, legal or other advisors. EMINEO PARTNERS shall not be responsible or liable for any discrepancies, omissions or results obtained from the use of this information. All information and examples are provided without any warranty as to their applicability in practice. EMINEO PARTNERS is not obliged to reflect the applicable legislation on the information and examples provided on this website.