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 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.

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*Deduction means decrease of taxable income received by the individual by the amount of those expenses.

** 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:

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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 two 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 incomes subject to inclusion into the tax return (for example, incomes 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.

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 2021. 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 2021. 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 2021 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 registered. 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 2021 and do not have any other income, benefits or deductions.

Required:
Calculate the personal income tax (PIT) liabilities of Igor and Irina for 2021 and state the amounts withheld by their employer, OOO Crown, and the amounts reported in their PIT return.

Answer (click here)

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 2021.

Irina's PIT return for 2021

 

RR

Salary paid by employer

 

3,200,000

  Total cost of the unfinished
  flat purchase

3,000,000

 

  Deduction used by Igor

(2,000,000)

 

Irina already submitted to the tax authority all appropriate documents in respect of the purchase that confirm the property deduction

 

(1,000,000)

Finishing works (confirmed with documents)

 

(200,000)

Materials required for the finishing (documents lost)

 

(0)

Tax base

 

2,000,000

PIT at 13%

 

260,000

Withheld by employer OOO Crown

 

(416,000)

Tax to be refunded by tax authority

 

156,000

The PIT withheld by the employer attributable to Irina’s property deduction will be refunded when the deduction is claimed in the PIT return.

Irina’s unused amount of property deduction of 800,000 RR (2,000,000 available less 1,000,000 and 200,000 used in 2021) 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 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 2021 at an interest rate of 4%, payable by 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 2021. Igor provided documents which confirm payments of the interest along with his PIT return for 2021.

Required:
Calculate the personal income tax (PIT) liability of Igor reportable in his PIT return for 2021 year.

Answer:

Igor PIT return

RR

Salary (Example 1)

3,200,000

Property deduction, as the notification was presented to the employer (Example 1)

(2,000,000)

Mortgage interest deduction (for period 02 July 2021 to 30 November 2021 inclusive)* 1,500,000*4%*(31-1+31+30+31+30)/365

(24,986)

Tax base

1,175,014

PIT at 13%

152,752

Withheld by employer (Example 1)

(156,000)

Tax to be refunded by tax authority

    3,248

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

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

Material gain

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 that lower interest rate and the limits shown below will constitute a material gain (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:

Rouble bank accounts and deposits, traded Russian bonds               

CB refinancing rate* increased by 5%

Foreign currency bank accounts and deposits

9%

Rouble loans

2/3 of the CB refinancing rate*

Foreign currency loans

9%

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

The taxable economy/benefit on interest (imputed income) is calculated as the difference between the actual interest rate and the threshold interest rates shown in the table.

The taxable benefit 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 2021.

EXAMPLE 3
If Igor did not manage to provide his employer with notification from the tax authority and get the property deduction; the employer does not deem the loan as a qualifying mortgage during 2021. However, Igor managed to get all relevant documents for confirmation of the property deduction (both for expenses and interest) in by the end of 2021. So, he decided to submit his PIT return for 2021 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 2021 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

 

1 May to 30 September 20217%
1 October to 31 December 20215%

 

Igor’s PIT calculated by OOO Crown

RR

Salary

3,200,000

Property deduction, as Igor did not manage to submit notification received from tax authority to the employer by the end of the year

             0

Tax base

3,200,000

PIT at 13%

416,000

Income taxable at 35% rate:

 

Interest rate from 1 July 2021 to 30 September 2021 4% < 2/3 *7% (2/3 CB RR) for this period – economy/ benefit on interest, imputed income arises

 

Imputed income for period from 1 July 2021 to 30 September 2021

1,500,000*(2/3*7%-4%)*(31-1+31+30)/365

2,493

 

Interest rate from 1 October 2021 to 30 December 2021 4% > 2/3 *5% CB RR for this period – no benefit on interest, no imputed income arises

 

 

Imputed income for period from 1 October 2021 to 30 December 2021

        0

 

Tax base

2,493

 

PIT at 35%

873

 

Igor PIT return for 2021

RR

Salary

3,200,000

Property deduction

(2,000,000)

Mortgage interest deduction (for period 2 July 2021 to 30 November 2021 inclusive) 1,500,000*4%*(31-1+31+30+31+30)/365

(24,986)

Tax base

1,175,014

PIT at 13%

152,752

Withheld by employer

(416,000)

To be refunded by tax authority

(263,248)

Incomes taxable at 35% rate
As property deduction confirmed, imputed interest is not applicable.

0

 

PIT at 35%

 

 

Withheld by employer as PIT on imputed interest

873

 

To be refunded by tax authority

(873)

 

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 2021 should be refunded according to the PIT return and an appropriate refund claim detailing Igor’s bank account. The refund should be made by the tax authority after completion of a desk audit within 4 months and 20 working days. This is made up of 3 months for the desk audit, 10 working days to make a refund decision plus 1 month to make the refund, a further 10 days is added if the tax authority reveals any violations of tax legislation in the PIT return. Provided that the taxpayer does not challenge the decision, it comes into force in one month from the day of delivery of the decision to the taxpayer.  

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:

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*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 after purchase 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 2021:

  1. On 12 August 2021 she sold a flat for 3,000,000 RR. She had purchased this flat on 21 July 2018. 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 2021 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 2016.

The plot of land was sold on 18 February 2021 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 2021.

Note: Ignore deductions applicable to the sales.


Answer
:

Marina's PIT return for 2021

RR

Sale of flat (Marina held the flat for more than 3 years. It was the only residential property she held at the time – so it is exempt)

0

Sale of the garage (non-residential property but held for more than 5 years – so it is exempt)

0

Plot of land (non-residential, purchased, held for less than 5 years – so it is taxable)

Sale income 600,000 < 0.7*1,000,000 cadastral value, so the income is taxable and deemed equal to the cadastral value multiplied by 0.7

700,000

Tax base

700,000

PIT at 13%

91,000

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 held less than 3 years). 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 2021:

Residential house sold for 3,500,000 RR on 5 December 2021 which he had purchased as completed on 1 February 2019 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 2021 which he had purchased as completed on 1 February 2019 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 2021 which he had purchased on 1 June 2020 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 2021.

Answer:

Piotr

 

PIT return of Piotr for 2021

RR

Sale of residential house held for less than 3 years – so taxable
Sales proceeds are more than cadastral value*0.7 – so actual income is taxable.

3,500,000

Property deduction of actual expenses of (3,100,000+50,000)>
1,000,000 so beneficial to use actual expenses
3,100,000 purchase value + 50,000 legal fees

(3,150,000)

Sale of share in flat
900,000 <910,000=cadastral value of 1,300,000*0.7, so taxable income is
1,300,000*0.7

910,000

Property deduction in respect of the flat sale

purchase value 910,000 < 1,000,000 but the deduction cannot exceed the income of 910,000 RR

(910,000)

Sale of the car

500,000

As actual expenses cannot be confirmed with documents, only 250,000 deduction can be used

(250,000)

Tax base

600,000

PIT at 13%

78,000

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 3 years) and deduction (up to 1,000,000 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 (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 2021:

  • 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 2021. 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 a 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 2021.

Answer:

PIT return of Ivan for 2021

RR

Inheritance exempt

0

Sale of inherited country house
(price not less than 0.7 of cadastral value, so actual income taxable)

4,000,000

Expenses of grandmother related to acquisition of the country house

(3,500,000)

Mortgage interest, paid by grandmother in respect of the acquisition of the country house

(400,000)

Retro-car gift
Incomes in respect of vehicles gifted are exempt from PIT only if received from close relatives. Mother-in-law is not close relative – so the income is taxable

700,000

Cash gift (money – exempt)

0

Shares gift from Ivan's parents, any gift from close relatives are exempt

          0

Tax base

800,000

PIT at 13%

104,000

Written by a member of the TX-RUS examining team