Can real estate tax be tax deductible costs?

Entrepreneurs who rent premises as part of their business activities may include expenses such as rent or expenses incurred in connection with the operation of the premises as tax-deductible costs. Is the same possible for property tax?

Real estate tax and tax deductible costs

The most popular and standard provisions of lease agreements provide for the division of receivables paid by the tenant to the lessor into individual amounts – compensation, administrative rent or utilities. Of the three mentioned, only the “excess” will constitute the landlord’s income. After all, the landlord does not keep the rent and utility fees for himself, but transfers them to the appropriate entities – the building administration and electricity and water suppliers. Therefore, it only serves as a kind of payment intermediary. Importantly, for a tenant running a business in the premises, the fees resulting from the lease agreement may constitute tax deductible costs.

An unpopular, but still practiced, method of paying real estate tax is to transfer its burden to the tenant of the premises. Such agreements include a provision on an additional fee resulting from the lease agreement, amounting to the equivalent of the real estate tax due for a given year.

Deduction of real estate tax from income

As a rule, in accordance with the provisions of the Personal Income Tax Act, real estate tax may constitute the costs of obtaining income for an entrepreneur, as costs incurred in order to obtain income or to maintain or secure a source of income and due to the lack of its indication in the catalog of excluded costs. Importantly, however, only those expenses that were incurred by the entrepreneur personally can be tax-deductible costs. Additionally, the Act regulating real estate tax indicates that it should be paid by the sole owner of the property, which is undoubtedly not the tenant.

It follows that the tenant cannot pay real estate tax directly to the tax authorities, but charging him with these fees in the lease agreement is not contrary to the regulations. The tenant will be able to classify such additional expense as a tax-deductible expense, just like other fees arising from the lease agreement. However, the lessor will then generate taxable income, because the payment of real estate tax “for him” will undoubtedly constitute a financial benefit.

Author:

Maciej Szkutnik

Specialist in the field. Taxes

 

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