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The year 2023 brings significant tax changes for entrepreneurs engaged in property rental services as part of their business activities. Not only has the method of taxing rental income for entrepreneurs changed, but also the rules for calculating property tax for commercially leased real estate. Unfortunately, these changes are not favorable for taxpayers.
Property tax for entrepreneurs
Since the beginning of 2023, owners of investment properties have faced a choice between renting their premises under private leasing terms or as part of their business activities (or another form of enterprise). In 2023, the Ministry of Finance introduced an unfavorable interpretation of property tax rates for entrepreneurs. Until the end of 2022, private and business rentals required paying a property tax rate applicable to residential properties, which was 1 PLN per square meter.
Individuals conducting business activities in property rentals will pay the maximum property tax rate of 28.78 PLN per square meter of usable space. In contrast, individuals renting properties for private use will continue to benefit from the more favorable rate of 1 PLN per square meter. The aforementioned property tax rate for entrepreneurs is stipulated in Article 5, Section 1, Point 2, Letter B of the Local Taxes and Charges Act (consolidated text: Journal of Laws of 2022, item 1452, as amended). It is worth emphasizing that this provision has long been controversial due to its imprecise reference to residential buildings or their parts “used for business purposes.”
Entrepreneurs’ dissatisfaction also stems from the fact that they previously opted for business rental over private leasing due to varying interpretations by tax authorities when renting multiple properties simultaneously.
Therefore, entrepreneurs will be forced to pay over 28-times-higher taxes. They can, of course, try to pass on these “new costs” to their clients-tenants. However, they must be prepared for the possibility that their offerings may become less attractive than those of private landlords.
Changes in rental taxation
The 2023 tax changes for properties go beyond just the property tax itself. Another significant amendment is the regulation of income tax rules related to private rentals. Until the end of 2022, taxpayers had the option to declare income from private rentals either using the general income tax scale or the lump-sum tax on recorded income. Starting in 2023, taxpayers can only declare private rental income using the lump-sum tax system stipulated in the Act on Lump-Sum Income Tax. This represents a substantial limitation for property owners engaged in private rentals. Importantly, opting for lump-sum taxation of private rental income by one spouse does not eliminate the right of other spouses to settle their taxes through a joint tax return.
An alternative to private rentals is renting property as part of a business activity. In this case, income tax can be declared not only using the lump-sum tax but also the progressive tax scale or a flat-rate tax. The choice of the most advantageous option will depend on the individual circumstances.
End of depreciation for business activities
Depreciation is the cost associated with the gradual consumption of fixed and intangible assets. In other words, depreciation is a cost that does not involve a cash outflow.
With the new regulations in effect, entrepreneurs will no longer be able to apply depreciation to rented premises. This change is a result of Article 22c, Section 2 of the Personal Income Tax Act, which stipulates that depreciation does not apply to residential buildings, including elevators (e.g., passenger lifts), separate residential units, cooperative ownership rights to residential units, or rights to single-family houses in housing cooperatives used for business activities or leased under an agreement. This may further discourage private tenants from converting their private leases into business rentals due to limited options for optimizing the costs of conducting business activities.
Optimization possibilities for fixed-rate rental tax
There are certain opportunities for optimizing lump-sum taxation for private rental income. First and foremost, attention should be paid to the structure of the lease agreement with the tenant. Suppose the costs associated with maintaining the apartment, such as rent, are clearly separated in the contract. In that case, the basis for calculating lump-sum tax for the property owner will be solely the rent.
Expenses related to apartment maintenance, including utility costs, contributions to common area maintenance, renovation funds, or property tax, can be formally passed on to the tenant. In this case, they will not be subject to taxation, even if the funds for these purposes are deposited into the landlord’s account. However, this option is not available to entrepreneurs renting apartments as part of their business activities.
Another solution may be to convert private rentals into rentals within a sole proprietorship. In such an arrangement, the landlord can completely forego lump-sum taxation in favor of linear or progressive taxation. One clear advantage of conducting rentals within a business is the ability to deduct tax-deductible expenses, such as repairs, maintenance, or purchased equipment (in the case of progressive and linear taxation).
On the other hand, it should be noted that establishing the property as a business asset will be necessary when operating as a sole proprietorship. Additionally, healthcare and social security contributions must be paid under a sole proprietorship. Moreover, there is an obligation to maintain accounting records for the sole proprietorship, which entails additional costs.
Considering the above considerations, it should be understood that the appropriate method for reporting rental income will depend on individual factors. In other words, each landlord must independently determine which option is more financially advantageous for them.