Tax Break for Landlords: A Hidden Risk

The Federal Tax Service (FTS) has published a clarification allowing individual entrepreneurs to avoid paying property tax if the property is used in business activities. This primarily applies to renting out apartments and condominiums. However, as calculations show, attempting to save on relatively small annual payments can lead to significant financial losses in the future, particularly when selling the property.

The tax break is available for entrepreneurs using special tax regimes — the simplified taxation system (STS) or the patent system. The condition is that the real estate must be used specifically for generating income. According to the FTS, in many cases, the exemption from tax is granted automatically if the inspection has relevant data, such as an active lease agreement.

If such information is not available, the entrepreneur is advised to submit an application for the tax break by the end of March, attaching supporting documents. However, the break does not apply to owners of administrative-business and shopping centers, as well as non-residential premises included in special regional lists. For example, in St. Petersburg, a list of 9,167 such objects was approved on 26 December.

The rates for the property tax itself are not high. According to the Tax Code, for residential premises, it is 0.1% of the cadastral value, for non-residential — 0.5%. Regions can change the rates, but not more than three times. For example, in St. Petersburg, the owner of an apartment with a cadastral value of 10 million rubles (approximately $100,000 at current rates) pays 15 thousand rubles (about $150) per year.

Moreover, citizens renting out housing have been able to apply a professional tax deduction for two years, reducing rental income by related expenses. Without documentary confirmation of expenses, a deduction of 20% of income is allowed. However, even considering this, the savings are insignificant. When buying an apartment for 20 million rubles (roughly $200,000) and monthly rent of 70 thousand rubles (about $700), the annual savings from the deduction will not exceed 22 thousand rubles (around $220).

The main danger of the tax break lies in the loss of the right to tax preferences when selling real estate. If the owner declares that the object is used for commercial purposes, they lose the opportunity to be exempt from personal income tax (PIT) upon its sale.

Let«s consider an example. An apartment bought for 20 million rubles (approximately $200,000) is sold after three years for 24 million rubles (about $240,000). If the owner lived there with their family, the PIT would be 390 thousand rubles (around $3,900), and the property tax for three years — about 90 thousand rubles (roughly $900). If the apartment was the only residence, the PIT could be zero.

With commercial use and receiving the property tax break, in the same situation, one would have to pay PIT of at least 3.5 million rubles (approximately $35,000). Meanwhile, renting out the property as an individual and paying 13% on income, annual payments to the state would be only about 110 thousand rubles (around $1,100).

If the sale occurs after five years of ownership, a private individual is completely exempt from PIT. For example, when selling after eight years for 35 million rubles (roughly $350,000), a private individual will pay only property tax (approximately 300 thousand rubles or $3,000 for the entire period) and tax on rental income (about 880 thousand rubles or $8,800 over eight years). If the object was used in business, the PIT upon sale could reach 5.2 million rubles (approximately $52,000).

An alternative could be to consider the real estate as a business asset and apply the STS. In this case, 6% is paid on income or 15% on profit, and property tax is not levied. When selling under STS, the tax on income of 24 million rubles (about $240,000) would be 1.44 million rubles (around $14,400), and on 35 million rubles (approximately $350,000) — 2.1 million rubles (roughly $21,000).

However, starting this year, entrepreneurs with revenue exceeding 20 million rubles (approximately $200,000) are required to pay value-added tax (VAT). For expensive real estate, this means additional payments. On 24 million rubles (about $240,000), VAT would be 1.2 million rubles (around $12,000), on 35 million rubles (roughly $350,000) — 1.75 million rubles (approximately $17,500), which practically negates the advantages of the «simplified system.»

Experts point to uncertainty in the criteria for classifying property as used in business activities. Maryana Kolesnikova from Maxima Legal explains: «The definition of property used in entrepreneurial activity is not fixed in legislation. In practice, key criteria are systematic profit generation from its operation, the presence of lease agreements, licenses, employment contracts specifying the workplace address, and other documents.»

Yuliana Bychkova believes that commercial purpose is indicated by renting out, receiving income to the individual entrepreneur«s account, and reflecting this income in the STS declaration. »Therefore, I believe that most often it is more beneficial for the owner to rent out residential real estate as an individual and pay the 13-percent tax, but gain exemption from PIT in case of sale,« she states.

Anton Nikulin, partner at the law firm «Pravy Bereg,» notes that even organizing a museum or gallery in an apartment can be considered commercial use. He also points out that closing the individual entrepreneurship before sale allows applying the general rules for calculating PIT for individuals.

Tax consultant Tatyana Makurova warns of the risks of arbitrary interpretation of rules by tax officials: «In the absence of a unified approach, local tax authorities often »play« with the rules to suit their tasks of increasing treasury revenues.»

According to the latest data from the FTS, 115.9 thousand individual entrepreneurs have used the property tax break. Of these, 70.7 thousand use the STS, and 37.6 thousand — the patent system. In St. Petersburg, 6.4 thousand individual entrepreneurs have applied for the break.