Tax Pitfalls When Selling Real Estate

If a private residential property is sold within 10 years, any profit is subject to income tax. This does not apply if the property was used exclusively for the owner’s own residential purposes between the time of purchase and sale. Different rules apply in the case of commercial real estate transactions.

Exceeding the three-property limit is considered an indication of commercial real estate trading. Accordingly, the sale of more than three properties within a five-year period is generally considered commercial and therefore subject to taxation. If more than three properties are sold during the period in question, this generally results in all sales being classified as commercial, including the first three properties.

However, even outside the 5-year period, properties can be included up to a maximum of 10 years if other circumstances justify the conclusion that there was an intention to sell at the time of acquisition or construction, e.g., if the transaction was carried out by an industry expert.

The individual is engaged in a commercial activity

The sale of fewer than four properties shortly after their construction may result in commercial activity and tax liability in the following cases:

• The seller constructs the building, and it is sold before construction is completed.

• The seller is a contractor and provides significant services for the construction that are not billed as if to third parties.

• The seller commissions a real estate agent to sell the building while construction is still underway