Immovable property

Topics around personal income tax (PIT) in respect of transactions with immovable property are examined in the TX-RUS exam and very often encountered in real life, although such questions are generally not answered as well as would be expected. This article will cover these topics within items B2(c), B4(b) and (c), B5(e), (f) and (g) of the syllabus and study guide.

Purchase of residential property – deductions

To encourage individuals to acquire residential property (houses, flats, rooms, land for construction of individual houses for residential use) the state introduced the property deduction equal to expenses related to the acquisition and respective mortgage interest, if the acquisition is financed via a mortgage loan (see next chapter). The deduction means decrease of taxable income received by the individual by the amount of those expenses. However, the deduction cannot exceed the income. The deduction can be used up to a lifetime amount not exceeding 2,000,000 RR (the amount is provided in the Tax Tables in the exam). The deduction can be claimed in respect of different residential properties.

If the residential property is purchased by a married couple the deduction can be claimed by each spouse within the lifetime limit of 2,000,000 RR, irrespective of which spouse paid for the purchase and which spouse gets the property rights to the property. All property purchased by spouses from common income or savings constitutes a joint property right (unless a different split of those property rights is stated in their marriage contract).

The deduction is not allowed if parties to the residential property sale contract (vendor and purchaser) are related or the purchase is financed by an employer.

* those costs are allowed to be deducted if the respective purchase contract clearly states that the residential property, which is subject to the contract, is not finished.

The deduction can be given in the tax period when the individual gathers and submits to tax authority (in one of two ways described below) the following documents in respect of the acquisition:

The deduction in respect of a newly constructed residential house on a plot of land should be given after registration of title to the house.

The property deduction can be claimed in three ways:

1. In the personal income tax return for the period when the above-mentioned documents are gathered. The tax return should be submitted by 30 April of the next year if the taxpayer received income subject to inclusion into the tax return (eg income not taxed by a tax agent at source).
   
   
2. By submitting the above-mentioned documents along with the appropriate official claim to the tax authority by the end of year when all the above-mentioned documents are gathered. In response to the claim, the tax authority should, within one month, present to the individual written notification of a special form relating to the deduction amount. The individual should present this notification to their employer. On receipt of the notification the employer should accordingly provide the deduction (decrease of taxable salary and amount of tax payable) from their employee’s taxable salary in the current year.
   
   
3. In simplified way after a year end for which the property deduction is claimed. Application for the deduction should be submitted in electronic form via taxpayer’s personal account on web page of tax authority. The application should consist of bank details of the taxpayer on which the PIT refund (attributable to the property deduction) will be made. The deduction can be claimed for three years previous to the year. Tax authority should place all appropriate tax data into the taxpayer’s personal account to fill in the application. Once the application is submitted, tax authority is allowed to conduct its desk tax audit in 30 calendar days. The period of the desk tax audit can be prolonged to three month if incompliance to tax legislation in the application is revealed. Tax authority should notify the taxpayer on the extension of the tax audit within 3 working days after the prolongation decision. During the tax audit tax authority is allowed to request explanations or documents if mistakes or controversies are revealed.

The deduction also can be made in respect of other income taxable at the standard rate of 13% - ie benefits in kind, gifts above limits, etc.

The following example illustrates how the above deduction works in practice.

EXAMPLE 1
Igor and Irina are a married couple working as programmers for the same employer, OOO Crown. Both are residents of Russia in 2022. The couple purchased a flat for their family for 3,000,000 RR paid from couple’s savings. The documents required to claim the property deduction were gathered on 1 August 2022. The couple have never used the property deduction in respect of a residential property purchase.

Igor managed to get notification from the tax authority on 15 August 2022 for the deduction of 2,000,000 RR and presented it to OOO Crown.

However, Irina submitted the claim along with the documents but did not receive the notification in respect of the remaining amount due to inefficiencies in the tax authority where she is living. So, she decided to claim the remaining deduction (including the finishing expenses noted below) in her personal income tax return.

The finishing works for the flat, which is clearly stated in the purchase contract, have not yet been completed. The finishing works will cost 200,000 RR plus a further 100,000 RR for materials. The works were confirmed by appropriate documents, but documents in respect of the purchase of materials were subsequently lost.

Igor and Irina each receive a salary of 3,200,000 RR during 2022 and do not have any other income, benefits or deductions.

Required:
Calculate the personal income tax (PIT) liabilities of Igor and Irina for 2022 and state the amounts withheld by their employer, OOO Crown, and the amounts reported in their PIT returns if required.

Note: List all the items referred to in the question, indicating by the use of zero (0) any item which does not impact the calculation.

Answer (click here)
*The deduction should be given in respect of salary for the whole year not for the remaining months following the notification being presented to the employer.

As Irina did not manage to get the property deduction from employer, she decided to submit her PIT return and recognise the deduction there. She notified the tax authority in written form that all documents confirming the property deduction have been submitted to the tax authority along with the claim in August 2022.

The PIT withheld by the employer attributable to Irina’s property deduction will be refunded when the deduction is claimed in the PIT return and application that consist of details of Irina’s bank account.

Irina’s unused amount of property deduction of 800,000 RR (2,000,000 available less 1,000,000 and 200,000 used in 2022) can be carried forward by Irina for future years.

As Igor did not have income other than salary, he does not need to submit a PIT return.

Mortgage interest deduction

The property deduction can also include mortgage interest if the purchase of residential property is financed from a mortgage loan. The deduction of mortgage interest can be claimed once in respect of one object of immovable property in an amount not exceeding 3,000,000 RR (provided in the Tax Tables in the exam).

The deduction is the amount of mortgage interest actually paid in the year.

Documents should be provided showing the interest payments, in addition to the same documents required to confirm the property deduction in respect of the acquisition of the property for which the mortgage loan was received. At the same time the acquisition deduction and mortgage interest deductions are not interdependent and can be claimed in respect of different objects of immovable residential property – acquisition deduction in respect of a few objects up to 2,000,000 RR and mortgage interest deductions in respect of another single object up to 3,000,000 RR.

To illustrate how the mortgage interest deduction works continuing Example 1, assume that Igor buys the flat for 3,200,000 RR of which 1,700,000 RR was paid from the couple’s savings, the rest was paid by Igor from a mortgage loan from his employer.

EXAMPLE 2
Igor receives mortgage loan from his employer of 1,500,000 RR on 1 July 2022 at an interest rate of 4% pa, paid on the third day after the month end. Igor has never claimed the property deduction in respect of either immovable property acquisition or mortgage interest. To claim the deduction Igor has to submit his PIT return after the end of 2022. Igor provided documents which confirm payments of the interest along with his PIT return for 2022.

Required:
Calculate the personal income tax (PIT) liability of Igor reportable in his PIT return for 2022 year.

Answer:

*December is not included as the related interest will be paid in January 2022.
 

The mortgage interest will not form an imputed interest (called also material gain or economy/benefit on the low interest rate loan) for an individual provided that documents confirming the related property deduction in respect of the residential property financed from the mortgage loan is in place, and provided to the tax authority(or employer) to confirm the right for the deduction of the interest.

In our example Igor submitted Notification on the property deduction to the employer and hence confirmed that the loan is of mortgage essence and its interest does not form imputed interest.

Imputed interest (material gain, economy/benefit on interest)

If an individual receives a loan with an interest rate below certain limits (see below) and if the loan is not one to which the property deduction applies; the difference between the limits shown below and that loan interest rate will constitute a imputed interest (an economy/benefit). This difference in amount will be deemed as imputed income for the individual and is taxable to PIT at 35%. The limits are provided in the Tax Tables in the exam:

Threshold interest rates for personal income tax purposes:

*Note: The CB refinancing rate is equal to CB key rate

The taxable imputed interest (economy on the interest) is calculated by on the last day of each month (irrespective of payment terms).

To illustrate how the imputed income taxed assume that Igor did not manage to get notification from the tax authority and submit it to the employer in 2022 to confirm the property deduction in respect of the purchased flat.

EXAMPLE 3
If Igor did not manage to provide his employer the notification from the tax authority and get the property deduction; the employer does not deem the loan as a qualifying mortgage for tax purposes during 2022. However, Igor managed to get all relevant documents for confirmation of the property deduction (both for expenses and interest) by the end of 2022. So, he decided to submit his PIT return for 2022 along with the appropriate documents confirming the property deductions. All other details are the same for Igor as in Examples 1 and 2.

Required:
Calculate the personal income tax of Igor for 2022 year withheld by his employer and reported in his PIT return.

Note: Central Bank refinancing and key rates (notional) provided in the Tax Tables in the exam:

Answer:

So the PIT withheld by the employer at 35% rate (and remitted to the budget) in respect of the economy/ benefit on interest (imputed income) in 2022 should be refunded according to the PIT return and an appropriate refund claim detailing Igor’s bank account (the procedure described in article 78 of Russian Tax Code). The refund should be made by the tax authority after completion of a desk audit within four months and 10 working days. This is made up of three months for the desk audit, 10 working days to make a refund decision plus one month to make the refund, provided that the tax authority does not reveal any violations of tax legislation in the PIT return.    

If the tax authority fails to meet the deadlines for the refund, late payment interest should be calculated and paid to Igor. The late payment interest should be calculated for each day of the delay using Russian Central Bank Refinancing Rate.

Sale of immovable property

To determine whether the sale of immovable property by an individual is subject to PIT the following rules should be considered:

*Close relatives are those recognised in the Family Code (eg parents/children, brothers/ sisters, grandmothers/grandfathers/grandchildren including biological/full and half-blood).

** The second residential property held for 90 days before sale of the first residential property is not deemed as a breach of the rule.

***Not examined.

For cases where the sale of immovable property is subject to PIT, the state introduced the cadastral value test rule (article 214.10 of RTC). This rule prevents evasion of PIT taxation by a seller who artificially decreases the value of the immovable property in the contract.

This rule states that if the value of the sold immovable property is less than cadastral value multiplied by 0.7, the taxable income from the sale is deemed equal to cadastral value multiplied by 0.7.

However, if there is no cadastral value for the immovable property sold, the rule is not applied.

The same formulae is applicable by the tax authority for the calculation of any related PIT, if the taxpayer did not submit a PIT return in respect of the sale of their immovable property. In such a case the tax authority applies a property deduction of 1,000,000 RR.

Those rules can be illustrated in the following example.

EXAMPLE 4
Marina had only the following transactions and related income in 2022:

1. On 12 August 2022 she sold a flat for 3,000,000 RR. She had purchased this flat on 21 July 2019. She used the proceeds to purchase a country house in the same month. The flat sold was the only residential property she held at the time of the sale.
   
   
2. On 17 July 2022 Marina sold a garage (ie immovable property) for 300,000 RR. Marina had purchased the garage and a plot of agricultural land on 12 May 2017. The plot of land was sold on 18 February 2022 for 600,000RR for which the cadastral value at the time was 1,000,000 RR.

Required:
Calculate the personal income tax (PIT) of Marina to be reported in her PIT return for 2022.
Note: Ignore deductions applicable to the sales.

Answer:

Sale of immoveable property – deductions

In respect of the taxable sale of a property (which is not exempt) an individual is allowed to use the following deductions

• Actual acquisition expenses in respect of the property sale. Those expenses should be confirmed with appropriate documents
• Up to 1,000,000 RR deduction for residential immovable property (up to 250,000 for property other than residential immovable). But the deduction cannot exceed amount of income in which respect the deduction is claimed.

The limits provided in the Tax Tables in the exam.

EXAMPLE 5
Piotr had only the following income and transactions in 2022:

Residential house sold for 3,500,000 RR on 5 December 2022 which he had purchased as completed on 1 February 2020 for 3,100,000 RR. Cadastral value of the house at the time of sale is equal to the sales price of the house.

Legal fees of 50,000 RR were paid by Piotr in respect of the house purchase.

Sold a share in a flat for 900,000 RR on 27 June 2022 which he had purchased as completed on 1 February 2020 for 600,000 RR. Cadastral value of his share is equal to 1,300,000 RR.

All above-mentioned expenses are confirmed by appropriate documents.

Car sold for 500,000 RR on 1 August 2022 which he had purchased on 1 June 2022 for 300,000 RR. Documents related to the purchase of the car were lost by Piotr.

Required:
Calculate the personal income tax (PIT) of Piotr to be reported in his PIT return for 2022.

Answer:

Inheritance

Income received by individuals (legatees) in kind/in money from inheritance are exempt* from PIT.

*However, remuneration for work related to science, literature, art, and also for patents, utility model and industrial design, are taxable within PIT if received by the legatee.

In respect of the sale of previously inherited property the same exemption (if held for three years) or deduction (up to 1,000,000/250,000 RR or related actual expenses) rules are applicable. Also legatees are allowed to deduct expenses related to the inherited property which were incurred by the legator to acquire the property, provided that those expenses were not previously deducted by the legator for PIT purposes, excluding expenses for which the legator received property deductions (for residential immovable property both expenses up to 2,000,000 and mortgage interest up to 3,000,000 RR). In other words, usage of the expenses as property deductions at purchase (both acquisition expenses up to 2,000,000 and related mortgage interest up to 3,000,000 RR) does not preclude the legatee from deducting those expenses on sale of the inherited property.

Gifts between individuals

The rules in respect of taxation of gifted property are similar to the rules in respect of inheritance with the following exception.

Any gifts received from close relatives are exempt from PIT.

However, if grantor and donee are not close relatives, according to the Family Code, a gift of immovable property, transport vehicle, shares or participatory(equity) interest represents taxable income within PIT. Gifts other than those listed above, received from an individual who is not a close relative are exempt from PIT.

EXAMPLE 6
Ivan had the following transactions in 2022 year confirmed with appropriate documents:

• Sale of own country house with value of 4,000,000 RR (equal to cadastral value) which was previously inherited by him from his biological (full blood) grandmother in February 2022. The country house had been purchased by the grandmother for 3,500,000 RR. In addition to the purchase cost she paid 400,000 RR interest in respect of mortgage loan which she used for the purchase. The loan was fully paid by her. She had never deducted the expenses for PIT purposes.
  
  
• Retro-car with market value of 700,000 RR was received as a gift from his mother-in-law (mother of Ivan’s wife).
  
  
• Cash of 50,000 RR was received from his friends as a birthday gift.
  
  
• Quoted shares (worth 100,000 RR) in a Russian company received as a birthday gift from his parents.

Required:
Calculate the personal income tax (PIT) of Ivan to be reported in his PIT return for 2022 year.

Answer:

Written by a member of the TX-RUS examining team