Income from the transfer of movable property

In order to establish private individuals’ income from the transfer of movable property, Article 58 of Act CXVII of 1995 on Personal Income Tax, as amended several times, must be applied.

Income received from the transfer of movable property must be established in such a manner that substantiated expenses charged to the transferring private individual are subtracted from the proceeds. Such expenses are the amount used for the acquisition of the property and related expenses, investments of value increase and expenses incurred in connection with the transfer.

The income received from the transfer of movable property qualifies as the so called “income separately taxed” at a rate of 25%.

The tax is determined by the private individual of the private individual selling the movable property, is declared in his tax return and is paid by the same deadline as the one prescribed for filing the tax return.

The portion of the tax on the combined income received during a year from the transfer of movable property that is not in excess of HUF 50,000 shall not be paid.

In practice, this means that if a private individual earns HUF 300,000 in income from the transfer of movable property, of the HUF 75,000 tax on this income, only HUF 25,000 has to be paid.

If the private individual’s income from transfers of movable property during a year is less than HUF 200,000, such an amount need not be declared.

Income from the transfer of real property

In order to established private individuals’ taxable income from the transfer of real property, Articles 59-63 of Act CXVII of 1995 on Personal Income Tax, as amended several times, must be applied.

What follows are the definitions of a few important terms used in connection with the establishment of income.

Proceeds

Proceeeds means all types of payments received by a private individual in connection with the transfer of real property.

The proceeds from the sale of real property serve as a point of reference for the establishment of income. Proceeds includes, among other things, the sales price, the fair market value, effective on the day of transfer, of an asset received in exchange, and late payment penalty interest paid by the buyer.

Costs

Another important step in determining the income from the sale of real property is the identification of eligible costs.

As a general rule, the following are eligible costs:

• the cost of acquisition and other expenses related thereto. Such expenses include:
  •  in the case of real property acquired through a contract of transfer, the amount of acquisition specified in the contract,
  • in the case of inheritance, the amount serving as the basis for establishing the relevant duties and the duty paid,
  • in the case of construction or reconstruction works and increase in net floor area all these subsequent to 1 January 2008, invoices issued prior to the date of the transfer and made out to the name of the private individual commissioning the construction,
  • in the case of a private individual purchasing, as tenant, a residential suite from a local self-government, the actual purchase price indicated in the contract,
  • legal and notarial costs, expert fees incurred in connection with the acquisition of real property verified by invoices, made out to the name of the private individual.
• Investments of value increase. Such expenses include:
  • costs of the development of public utilities, investments aimed at infrastructural refurbishment and modernisation,
  • extension and reconstructions prior to 1 January 2008,
  • costs of preservation works during a 24-month-long period preceding the date of the sale if such costs exceed 5% of the purchase price specified in the contract for transfer,
• expenditures incurred in connection with the transfer and verified by invoices. (e.g. expert's, land agent's fee)

Specifying the date of obtaining income from the sale of real property

Income from the sale of real property is considered obtained on the date when a referent valid contract (document, court or official decision) pertaining to such transfer is filed with the real estate supervisory authority.

 Specifying the date of the acquisition of real property

In respect of real estate properties, the date of acquisition is the date when a referent valid contract (document, court or official decision) pertaining to such transaction is filed with the real estate supervisory authority. In the case of inheritance, the date of acquisition is the date of the death of the bequeather.

As regards the construction of an edifice on a property after 31 December 2007, as a rule, the effective date of the resolution containing the last occupancy permit is considered the date of acquisition. The foregoing notwithstanding, under the applicable law, the private individual may, at his discretion, identify the date of acquisition of the real property in existence already before the above date and the date of acquisition of the real property constructed or of the extension made subsequent to the above date as separate dates.

Establishment of the income

As a first step of establishing the income, eligible costs must be deducted from the proceeds. The amount thus obtained is the calculated amount. (At this point, it is important to note that eligible costs cannot exceed the proceeds.)

The calculated amount can be further reduced in regard of the passing of years. If a private individual sells a constructed structure registered or in the process of being registered in the register of the real property supervisory authority as a detached house or a residential suite and the land on which it is located, income from such transfer comprises:

• 100% of the calculated amount in the year of acquisition and in the following year,
• 90% of the calculated amount in the second year following the year of acquisition,
• 60% of the calculated amount in the third year following the year of acquisition,
• 30% of the calculated amount in the fourth year following the year of acquisition,
• 0% of the calculated amount in the fifth year following the year of acquisition and in any subsequent years.

Based on the above, if a private individual sells, in 2010, a dwelling house purchased in 2005 or before, no taxable income is generated.

If other types of real property, such as a holiday home, a construction site or business premises, are sold, and the transfer takes place in the year of the acquisition or in any one of the five years subsequently following it, it is the calculated amount that can be treated as income. Subsequently, i.e. from the sixth year following the acquisition, income must be established in a manner that the calculated amount must be reduced by 10% with reference to each year. Thus, no taxable income originates from the sale of the real property in the 15^th year following the year of the acquisition (e.g. if a holiday home purchased in 1995 is sold in 2010, this does not generate any taxable income).

The rate of tax

Income from the sale of real property is taxed separately, i.e. it is not included in the consolidated tax base.

Once the income from the sale of real property has been established, the amount of the tax payable on it must be calculated using the applicable rate of tax, which is 25%.

The tax is determined by the private individual in his annual tax return, and is paid by the same deadline as set for filing the tax return.

Private individuals must use Personal Income Tax Return Form No. 1053 to declare their income from the sale of real property in 2010. The tax return must be filed by the applicable deadline and the tax shall be paid by the same deadline as set for filing the tax return.

Here is an example to illustrate the foregoing:

Private individuals “A”, “B” and “C” sell real property in an amount of HUF 20,000,000 in 2010.

Private individual “A” bought an apartment for HUF 10,000,000 in 2007. This person renovated the apartment in 2009. The costs, evidenced with invoices, amounted to HUF 2,000,000.

Private individual “B” bought a holiday home for HUF 10,000,000 in 2005. He spent HUF 5,000,000 on its modernisation and had it re-categorised as a dwelling house by the Land Registry Office.

Private individual “C” bought business premises (a shop) for HUF 10,000,000 in 2000, to which a bathroom, worth HUF 2,000,000, has been constructed as an addition. He had the shop painted, which cost HUF 500,000, in 2009.

Although private individual B purchased a holiday home, he sold it as a dwelling place, therefore, the 5-year rule applies.

In the case of private individual C, the cost of painting (preservation works) is not an eligible cost, as it is less than 5% of the proceeds.