When you sell a piece of immovable property, you will have to pay taxеs according to the order given in two tax laws – the Local Taxes and Charges Act (LTCA), and the Natural Persons Income Tax Act (NPITA).
First in time come the tax obligations according to the order in the LTCA– the very performance of the conveyance transaction is impossible without first paying the tax on the acquisition of property for a consideration.
The tax obligation is to the amount of 2 percent on the agreed price. If, however, the agreed price is below the tax assessment value of the piece of property, the tax obligation is determined on the basis of the tax assessment value. That is why, in the case of performing a conveyance transaction, a tax assessment value of the property must exist. It is prepared by the employees of the municipal administration where the piece of property is located (within 2 weeks after submission of an application according to a sample) by observing a set of methods taking into account the variety of factors that have an impact on the market price of the property: the construction type, the location, etc. Those who want to learn how the tax assessment value of their property is calculated may read Annex 2 of the LTCA. It is more than certain that the question of who owes the tax – the seller or the buyer – presents an issue of real interest to the parties to a transaction with immovable property?
The rule embedded in the LTCA (art. 45, sec. 1) is that this tax obligation should be assumed by the buyer. The law allows agreeing otherwise – for example, the tax may be paid in full by the seller or the tax could be owed by both parties according to a certain proportion. This, however, is not a rule in the law, but the will of the parties to the transaction which must be expressly indicated in the sales contract. Apart from the order introduced by the LTCA, there is simultaneously another, more general order introduced by the Obligations and Contracts Act (OCA) – the expenses related to the sale of immovable property are equally paid by the parties (art. 186 of the OCA). In the final account, the practice followed by most people has been that the tax is paid not only by the buyer but in equal parts by the buyer and seller.
The tax is paid at the municipality where the immovable property is located, and you are not required to submit a tax return.
In the case of immovable property sales, beside the already mentioned 2 percent tax which is payable in accordance with the LTCA, still another tax is payable in accordance with the order in the NPITA. This tax is payable only by the seller of the immovable property. The reason for levying this tax is that by reason of the sale one may realize additional personal income which also becomes the object of taxation. The tax becomes due in the event of a positive difference between the sales price and the higher of the factual purchasing price and the tax assessment value of the immovable property. In this case, the tax assessment value fulfils the role of an updated price of acquisition. It is used if the immovable property was purchased fairly long ago. For example, when selling a piece of immovable property at an agreed price of BGN 10 thousand and the property was purchased 40 years ago at a price of BGN 2 thousand, but the tax assessment value calculated by the municipal organs is BGN 6 thousand, then in this case the seller, apart from being obliged to pay half of the tax (2 % on the overall sales price) to the amount of BGN 100 (BGN 10,000 Х 2% : 2) as per the order in the LTCA, will also owe a tax on the created additional personal income of BGN 4 thousand (BGN 10,000 – BGN 6,000).
Unlike the sales tax as per the order in the LTCA, the amount of the tax obligation on this additional income cannot be determined in a simple manner. It is not determined at the time of making the transaction but on the following year. If you sold a piece of immovable property in 2006, you should submit an annual tax return according to the order in art. 41 , sec. 1, of the NPITA on 15th April at the latest, indicating in the respective annex of the return the sales price, the factual purchasing price, and the tax assessment value (the updated price). If on the basis of the indicated figures you declare a positive difference, then this difference representing the income from the sale is added to the other personal incomes that were realized in 2006, such as from employee salaries, civil contracts, rent payments, etc.; and the sum total will be taxable on a progressive annual tax scale as per art. 35 of the NPITA. As it is known, with this scale the obligation varies depending on the size of the tax basis, the amount of the taxable income respectively. For the year 2006, the tax rate increases from "0" at an annual tax basis of up to BGN 1,560 to 24% at an annual tax basis of over BGN 7,200. This means that if the annual tax basis from all the other incomes exceeds BGN 7,200, then the additional income of BGN 4,000 from the sale of the immovable property would be automatically taxed by the highest possible tax rate of 24%, meaning that you would have about s of the income left (BGN 3,040 instead of BGN 4, 000).
An interesting question is what would happen if the agreed price was equal or less than the tax assessment value, for example BGN 5,900. In this case, no tax is due as far as the sale of the property has not created an additional income. We remind you that we are comparing the agreed price of BGN 5,900 with the tax assessment value от BGN 6 thousand, and not with the factual purchasing price от BGN 2 thousand. In this case, the only tax that you would have to pay as a seller of the property is the tax as per the LTCA to the amount of BGN 60 (BGN 6,000 х 2 % : 2).
It is no secret that despite the increase of the tax assessment values since the beginning of 2006, in most cases they became substantially lower than the real prices on market. For example, currently the tax assessment value of a newly built apartment with brick walls in the center of the city of Sofia with a square footage of about 100 sq. m. is BGN 78,174 while the sales piece is about EUR 100 thousand. If you are the seller of the apartment (independent of whether you have or do not have other incomes), you would have to pay a tax as per the order in the NPITA of about BGN 28 thousand. Add also another BGN 1,950 – the half of the tax as per the order in the LTCA (2% х EUR 100,000 * х 1.95: 2) – and your total tax obligation becomes about BGN 30 thousand. We would have to further add in this respect that there is also a significant difference between the tax assessment values and the real sales prices of parcel lots around Sofia (20-fold at times), of the forest massifs, etc.
Given such significant differences, the temptation to indicate a lower sales price is great. We will draw your attention however to the fact that if a lower price has been indicated and thereafter the transaction has been rescinded, then it is possible that only the price that was indicated as the sales price in the notarial deed would be restored to the seller. It is well-known that in order to avoid the risk connected with a sale in which a lower price was indicated, a clause is added to the notarial deed in the sense that if the transaction would be rescinded through the fault of the seller, then the seller shall owe to the buyer damages to an amount arrived at on the basis of the difference between the price indicated in the notarial deed and the price that was actually paid. Please pay attention however that if the above-mentioned amount of damages is too great, then it would be practically unfeasible that the court of law would confirm the payment of such damages.
Finally, we conclude with that with which we should have probably started – independent of the amount of the realized income, you do not have to pay a tax as per the order in the NPITA if you are selling a piece of immovable property:
- acquired through inheritance, as a gift, as a result of the restitution of properties;
- that has been used by you as your primary place of residence for a period of at least three years before the sale or the exchange;
- which is one of two pieces of immovable property that are not your primary place of residence, if the time between their acquisition and the time of their sale or exchange is more than 5 years;
- which is agricultural and forest property, independent of their number, if the time between their acquisition and the time of the saleта or exchange is more than 5 years.
The incomes obtained in the enumerated cases are treated as non-taxable. That is why they need not be declared in the annual tax return as per art. 41, sec. 1, of the NPITA. The only tax that you owe in the above-mentioned cases is the tax to the amount of 2 percent as per the order of the LTCA, which as a rule you will divide with the other participant in the transaction.
Speaking more precisely, the procedure which we have reviewed for the tax treatment of the income from the sale of property as per the order of the NPITA concerns only natural persons who are local residents. Currently, there is a different procedure in force for natural persons who are foreigners.
From the Dnevnik daily