How to calculate and optimize immovable property tax in Latvia

05.11.2014 Natalia Osipova, real estate specialist, lawyer; Maya Geraskina, tax consultant

We all wish to live well! Sooner or later a necessity to sell immovable property may arise and one would wish to save on tax payments. Our lawyer recommend how to do it right.

Lately the State Revenue Service (hereinafter – SRS) is actively involved in examination and payment of taxes from the sale of immovable property. In this regard had increased the number of clients interested in calculation and optimization of taxes in respect of real estate transactions. Many unpleasant moments arise because people don’t know that upon selling the immovable property one has to pay personal income tax. 

As of 2010 the positive difference between the sum of purchase and the sum of sale of immovable property is subject to personal income tax. However, even those who are informed of this tax obligation mainly remain unaware that if the funds received from the sale of immovable property were directed to settle the creditor debt or were handed to other persons, then there’s no income and therefore the tax shall not be paid. And the biggest mistake people make in such situations is ignoring SRS letters in respect of unpaid tax. This false impression may lead to big problems: penalties accrue, tax debt increase enormously, court cases, etc. Quite often we have had to deal with such situations: people don’t understand why they are being demanded to pay tax, how the tax is calculated and what to do next. We explain and help, but this is one of the cases where it is better to foresee the situation rather than solve. Therefore we ask all: if you have received the letter from SRS with unclear requests – don’t ignore! Consult a lawyer. Or even better – consult a lawyer before the sale of property. 

This article is aimed to inform our existing and prospective clients regarding the calculation and optimization of tax from the sale of immovable property. 

Tax shall not be paid:

  1. If the immovable property as of the moment of registration in the name of the owner in Land Register was in the ownership 5 years (60 months) and at least any 12 consecutive months within this 5 year period has been the declared place of residence of the owner.Of course, this condition does not concern the sale of land because it is impossible to have undeveloped land plot as declared place of residence. 
  2. if the immovable property, as of the moment of registration in the Land Register was in the ownership more than 5 years (60 months) and last 60 months – this was the sole immovable property owned. 
    For instance: one has received an apartment as a gift from the mother in 2006. In the Land Register the title to apartment was registered in March 2007. In 2014 he/she decided to sell the apartment and buy a house. Because the apartment was the sole immovable property owned and in exchange of that apartment another residential space is being acquired, then in this case the tax shall not be paid. 
  3. If the immovable property being sold is registered in Land Register as the only property and the owner invests the income obtained from the sale into functionally similar property within 12 months prior to or after the alienation. Put differently, if the only one apartment is sold and another is being bought (or a house or a house with land), then this is not considered as income. However, if a house is sold and an apartment acquired (this already is not a functionally similar property), then taking into consideration all circumstances, income may arise which is taxable at the rate of 15%. 
    For instance: if more than 5 years you are the owner of single apartment and your place of residence is registered somewhere else, but you sell you apartment with an aim to acquire another immovable property, then you don’t have to pay tax.Please note that this condition applies to transactions entered into after 1 January 2014. If the same transaction is entered into before 1 January 2014, it will be subject to tax.

Recently a client instructed us to consider the activities of SRS. The client was the only owner of the apartment since 1997. Due to certain circumstances he did not live in said apartment and it was not his declared place of residence. In 2012 the client sold his sole apartment and in 2013 acquired a smaller apartment. And in 2014 he received a notice from SRS to pay tax from the received income. Considering that this condition about sole lodging came into force only as of January 2014, but the transaction was performed in 2013, said norm does not extend to transactions entered into prior to January 2014. Therefore tax had to be paid, but we have managed to optimize the amount of payment. A very important aspect is registration of the property in the Land Register. Upon selling the property the starting point for determining the period within which the property has been owned by the seller is the date of its registration in the Land Register and not the date of entering into the purchase agreement contract, as many believe. From the legal point of view, the property owner is the person registered in the Land Register, so once you have purchased a property you should immediately register your property rights in the Land Register.

The same rule refers to the cases when a person has obtained a property through the inheritance from an individual or a relative up to the third degree of kinship – the moment when the person has obtained the inherited property shall be the registration day in the Land Register in the name of the legatee.  

Example: A client received the immovable property under the will in 2004, and registered the ownership in the Land Register only in 2012. We explained to the client that in this case the moment when the property has been obtained will be 2012 and not 2004 as he was sure, so when he decides to sell the property he will have to pay the income tax.

Besides, we would like you to pay attention to the fact that from July 1, 2014 when selling agricultural land one does not need to pay the income tax if the land is being sold to the farmers. But! If agricultural land is being sold alongside with buildings and constructions income tax will be imposed.  

How the initial value of the property should be determined

If upon alienation of the property it is obvious that the income tax is to be paid one should understand that the tax is paid as a difference between the selling price and the initial value.  The initial value is sum for which the property has been purchased once; or the sum appearing in the certificate of inheritance; or the sum specified in the donation agreement. 

How to reduce the amount of the taxable income 

Taxable income can be reduced on account of: 

  1. the sum of repairs and renovations that have been made regarding the property (replacement of doors, windows, plumbing, etc.) if it can be proved with the documented (receipts);
  2. the amount of expenditure spent on the purchase and registration of the property (state fees, commissions, notarial fees and other similar expenses). Again, the relevant documents should be provided;
  3.  if the property was purchased through the loan the interest payments on the loan can also be included into the reduction of taxable income provided that the loan was provided for the purchase of this particular property.

Deadline for submitting the income declaration and payment of taxes.

After receiving an income from the alienation of the property in the State Revenue Service (SRS) one must submit an income declaration and then within the 15-day period the tax should be paid.
Deadlines vary according depending of the sum of the obtained income:

  • If the income from the alienation of the property exceeds EUR 711.44 the declaration should be submitted till the 15th of the following month;
  • If the income from the alienation of the property is from 142.30 to 711,43evro the declaration is submitted before the 15th of the month following the current quarter; 
  • If the income from the alienation of the property is less than 142.29 EUR the declaration is submitted before the 15th of the month following the current year (not later than 15th January of the following year).

Sale of the property by installment 

When entering into the purchase agreements of the property by installments over several years it is necessary to bear in mind that a tax on the profit will have to be paid within three years from the date of purchase.

Example: the sum of the purchase agreement of the property is 100 000 EUR under the condition that the payment must be made within 10 years. Annual payment – EUR 10 000. The seller must submit the income declaration to the SRS every year for 3 years in a row. On the first and second year he must declare his income EUR 10 000 each year, and on the third year the remaining sum 80 000 EUR should be declared.

There can occur many more different situations in respect of the division of the property (e.g. when dissolving a marriage) the sale of the multiple property (consisting of the plot of land and buildings, structures), the sale of privatized apartments which have not been registered in the Land Register due to objective reasons. In determining a taxable income it is important to know the declared place of residence of those who have stayed abroad for a long time. In such untypical situations one should be guided not only by the law, but also by the rules of the Cabinet of Ministers, the data of the Statistical Office, the knowledge of the Civil Code and other legal aspects.

Tax legislation is rather complicated and has many peculiarities so we advise our readers: before you sell your property you should contact a specialist who will certainly help you to make the right decision.

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