Capital gains tax explained: What happens when you sell an investment property?
You are clearly in a situation where you have decided to sell your investment property. Perhaps you are reorganizing your investment portfolio, or maybe now is just a good time to realize the returns on your investment. Whatever the reason, selling a property always has tax implications, and it is very important to be aware of these. In this concise article, we will go through the basics of capital gains tax and explain how it is calculated. At the same time, we will look at what deductions you can take advantage of and also go through the taxation of corporate loans in a sale situation, so that you can avoid unnecessary and unpleasant surprises when filling out your tax return.
Let's calculate the sales profit using an example
The purchase price of your investment property was €50,000, and the sale price was €70,000. Based on these figures, the capital gain is €20,000.
What expenses can you deduct from your sales profit?
You can deduct (and we strongly recommend that you do so) the €1,000 transfer tax paid at the time of purchase from the sales profit if the transfer tax was 2% in the year of purchase. In 2024, the transfer tax on apartment shares will be 1.5%. Please note that the transfer tax paid in the year of purchase is deductible.
If you have used a real estate agent to sell your apartment, you can deduct the agent's commission, for example €3,500.
In this case, the taxable capital income is
€20,000 – €1,000 – €3,500 = €15,500.
When the apartment has been rented out, you have probably deducted the rental income from the cost of new appliances and any renovations you have made to the apartment. Of course, if this is not the case, you can also deduct the cost of renovations from the sales profit.
How capital gains are taxed & the role of corporate loans in taxation
Depending on the capital income tax rate, you must pay either 30% or, if your capital income exceeds €30,000 per year, 34% on the excess amount.
An important thing for real estate investors to note is the taxation of corporate loans in the event of a sale. If the housing company has not recognized the corporate loan as income in the housing company's accounts, it is then considered to be funded. This means that you have not been able to deduct the loan expenses from your rental income. The capitalized company loan is added to the acquisition cost of the share, which means that you can deduct it when selling the apartment.
It is important to remember that although the profit from selling an investment property is usually taxable capital income, you can sell your investment property tax-free if you have lived in the property yourself for at least two years before renting it out.
In other words, if you originally purchased the apartment as your own home and have lived there for at least two years, you can rent it out and eventually sell it tax-free. This is provided that you have lived in the apartment continuously for at least two years before you realized the wonders of real estate investment and decided to use it to generate rental income.
If you have not lived in the apartment for two years before renting it out, the profit from the sale is considered taxable capital income. This means that you will have to pay tax on the profit from the sale (also known as capital gains). If, on the other hand, you sell your investment apartment at a loss, you can deduct the loss from other sales profits you have received in the same year for tax purposes. And just to clarify, if the terms capital gains/capital gains tax are not yet ingrained in your mind:
Capital gains tax, or capital gains, is the profit you make when you sell an asset, such as an apartment. It is calculated by deducting the purchase price of the asset and the costs incurred in the sale from the sale price.
Example: If you sell your apartment for €100,000 and bought it for €80,000 when the market was booming, and the selling costs were €2,000, the capital gain on this transaction is €18,000 (100,000 – 80,000 – 2,000).
Please also note that the purchase price includes, for example, the transfer tax paid at the time of purchase. Selling expenses include, for example, brokerage fees.
Behind these links, you will find more waterproof reading material and more detailed information:
https://www.vero.fi/henkiloasiakkaat/omaisuus/asunnon-myynti/ & https://www.vero.fi/henkiloasiakkaat/omaisuus/luovutusvoitto/
https://www.vero.fi/henkiloasiakkaat/omaisuus/varainsiirtovero/asuntoosakkeen-ostaja