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Sale of properties acquired by a natural person through inheritance in the light of changes in Polish tax regulations

The tax consequences of acquiring a title to any tangible property located in the Republic of Poland or property rights exercised in the Republic of Poland by natural persons through inheritance are regulated by the Act of 26 July 1991 on Personal Income Tax and the Act of 28 July 1983 Inheritance and Gift Tax.

Pursuant to Article 6(1)(1) of the Act of Inheritance and Gift Tax, the tax obligation on inheritance acquisitions arises at the moment of acceptance of the inheritance.

In the Polish legal system, the acquisition of property and property rights results in a tax obligation for an heir who is a natural person in the form of payment of personal income tax.

The tax rate is based on the value of acquired property or property rights after deducting their debts and burdens (if such debts or burdens occur). The value of property or property right is determined according to its state as at the date of acquisition and according to the market prices as at the date of occurrence of the tax obligation.

In the context of the income tax on the sale of real estates purchased by natural persons on the basis of inheritance, it is necessary to analyse the amendments to the tax law that have been introduced in recent years.

Since 1 January 2007, the inheritor was obliged to pay the personal income tax in the amount of 19% of the real estates’s value in case of selling such a property.

In 2007, the legal regulations provided for two possibilities of exemption from the obligation to pay 19% personal income tax on the value of inherited real estate when selling it.

The first possibility was to postpone the sale of the inherited property until 5 years from the end of the calendar year in which the inheritance occurred, i.e. in which the decedents’s death took place.

It should be added that since 2007, it did not matter how long the property was in the possession of the testator.

The second possibility to avoid the obligation to pay 19% personal income tax when selling the inherited real estate was to take advantage of the so-called registration relief, which meant the official registration of the heir in this property for permanent residence for a minimum period of 12 months. The tax-free sale of such a real estate was only possible after the minimum of 12 months had elapsed.

The latest amendment to the law, which came into force on 1 January 2019, entailed significant and undoubtedly beneficial changes in the tax law in the context of income tax on the sale of real estates acquired through inheritance. As a result of the new regulations, inheritors may be exempted from the obligation to pay personal income tax much earlier than before.

The principal difference from the previous legal status is that from 2019 on, the length of the period for which the real estate has been in possession of the testator is taken into account. Currently, the 5-year period after which the inherited property can be sold without the duty-bound to pay 19% personal income tax is calculated not from the end of the calendar year in which the death of the testator occured, but from the date of acquisition or erection of this property by the bequeather.

The new regulations apply both to heirs who acquired real estates after 1 January 2019 and to those who acquired the inheritance before the latest amendment. The deciding factor will be the moment of sale of the property, not the moment of inheritance itself.

However, the question arises whether the inheritor who wants to sell a real estate which has not been in the possession of the testator for at least 5 years now is required to pay 19% personal income tax on its value or not. In this area, lhe legislator provided a possibility of additional exemption from the obligation to pay personal income tax on inherited real estate. A tax-free sale of such a property is allowed when the means obtained from its sale are allocated for the inheritor's own residential purposes.

Article 21(25) of the Act of 26 July 1991 on Personal Income Tax contains an exhaustive list of expenses which shall be understood as made on residential purposes. The list includes expenses incurred, among others, on:

a) the acquisition of a residential building, its parts or a share in this building and the purchase of land or share in such land attached to this building;

b) the acquisition of a housing co-operative ownership right to a residential premises or a share in such a right, the right to a single-family house in a housing co-operative or a share in such a right;

c) the acquisition of land for the erection of a residential building or a share in such land, the right of perpetual usufruct of such land or a share in such a right;

d) the construction, extension, upward extension, redevelopment or renovation of a residential building, its part or own residential premises;

e) the extension, upward extension, redevelopment or adaptation for residential purposes of a non-residential building, its part, own non-residential premises or own non-residential room;

f) the repayment of a credit (loan) and interest on said credit (loan) taken by a taxpayer before the day of earning the revenue from the disposal of inherited real estate fot the purpose mentioned above.

With regard to the exemption of the heir from the abovementioned personal income tax obligation, attention should also be paid to the provision on time limits, as the law has been altered here, too.

Before 2019, the condition for obtaining the tax exemption was that the assets from the sale of the real estate were allocated for the inheritor’s own residential purposes within 2 years from the end of the tax year in which the sale was made. Presently, this timeframe has been extended up to 3 years.

To sum up, the changes in the tax law provisions which came into force on 1 January 2019, should be considered as decisively favourable. The heirs are now be able to sell their inherited real estates faster and more flexibly after the formal settlement of the inheritance acquisition without the necessity to cover 19% personal income tax on the value of the real estate.

The extension of the time limit for the allocation the means from the selling of the real estate for the heir's own residential purposes from 2 to 3 years is also undoubtedly benefitial. The new method of calculating the 5-year period for tax-free sale of real estate is also of no small importance. It will certainly improve the position of those heirs who are in a difficult financial situation and want to cash their newly inherited property as quickly and as profitably as possible, without the necessity to pay a high income tax.