Purchase of real estate – tax regulation

Taxation of the transfer of real estate ownership (purchase, exchange, inheritance, donation, entry and exclusion of real estate from a company, acquisition by law, acquisition by court or other authority decision) in the Republic of Croatia is primarily regulated by the Real Estate Transfer Tax Act, by the Value Added Tax Act and the Income Tax Act. This article covers the matter of taxation based on purchase and sale of real estate.

 

Which tax is applicable when buying and selling real estate?

  1. Real estate transfer tax or
  2. Value added tax-VAT (hereinafter explained in more detail when paying any of the above taxes)
  3. Property income tax based on the alienation of real estate
    1. Surtax on income tax

1. Real estate transfer tax

As the basic rule in the taxation of real estate transfer, the person which acquires the real estate is the taxpayer. From this fact we can easily determine that in terms of concluding a contract for the sale of real estate the buyer is also the taxpayer.

Tax rate: 3% of the determined market value of the property (at the time of writing this article).

Tax base: Market value of real estate at the time of occurrence of the tax liability.

Note: The market value of real estate is estimated by the Tax Administration based on the price specified in the contract for the sale of real estate, which is then compared with the data on prices that are achieved or can be achieved in the market for similar real estate, while taking into account the location and similar time of realization of the real estate sale.

The tax liability arises at the time of concluding of the contract for the sale of real estate.

The real estate transfer tax return must be submitted to the competent branch office of the Tax Administration by a notary public upon verification of the signatures on the sales contract, and no later than within 30 days.

The Tax Administration issues a decision determining the tax liability.

Payment: within 15 days from the date of delivery of the decision from the Tax Administration.

2. Value Added Tax (VAT)

VAT on the sale of real estate must be calculated and paid by taxpayers entered in the register of VAT payers when concluding a contract of sale:

  • construction land (in terms of the VAT act, it is considered to be the land for which the final approving act for the construction has been issued);         
  • unfinished buildings;         
  • new buildings or a part of the same and the land on which it is located before the first accommodation or use;         
  • the building or part of the building and the land on which it was built if less than 2 years have elapsed from the date of the first use or accommodation until the sale ;         
  • reconstructed building, if the reconstruction costs in the previous two years, prior to the delivery, are higher than 50% of the sale price.         

Tax base: purchase price of real estate.

Tax rate: 25% (at the time of writing this article).

Exemption from VAT applies if a contract of sale is concluded:

  • the building or part of the building and the land on which it was built if more than 2 years have elapsed from the date of first use or accommodation until the sale ;         
  • agricultural land and any other land, except construction land.         

Note: A taxpayer who is selling a property exempt from VAT to another taxpayer may choose to apply VAT if the buyer is a taxpayer who is entitled to deduct input tax in full.

 3. Property income tax based on the alienation of real estate

This tax is paid by the seller of real estate if the property is sold within two years from the date when the real estate was obtained by the seller.

The transaction is exempt from the tax in question if:

  • the real estate was used for housing the seller and dependent members of his immediate family (with certain exceptions);         
  • the alienation was carried out between spouses and relatives in the first line of succession and other members of the immediate family;         
  • the alienation was performed between divorced spouses, if the alienation is directly related to the divorce;         
  • the alienation is in direct connection with the inheritance of real estate (also with a certain exception) ;         
  • the property has been alienated after two years from the date of acquisition.         

The income tax return based on the alienation of real estate must be submitted by the seller to the competent branch office of the Tax Administration according to his residence within 8 days of the alienation of real estate.

Tax rate: 24% (at the time of writing this article).

Tax base: the difference between the income determined according to the market value of the real estate and the purchase value of the real estate increased by the growth of the prices of industrial products, with the possibility of deducting the costs of alienation as expenses.

Payment: within 15 days from the date of delivery of the decision from the Tax Administration.

  1. Surtax on income tax

Surtax on income tax is calculated and paid if the surtax on income tax is prescribed by the city or municipality in which the taxpayer of income tax has his registered residence or usual residence.