Taxes on real estate sales and rentals
Taxpayers deriving business profits and independent personal service gains must file tax returns annually, regardless of whether there is income or not. The same does not apply to other taxpayers. For example, individuals who rent or sell their real estate must file tax returns only for the year when rents are collected or the sale is performed. In this article, we will discuss the taxation of incomes derived in 2018 from residential property or offices outside of the scope of commercial activity, under two main titles (rental income and gains on sales).
I. TAXATION OF RENTAL INCOMES
A. Rental ncome from res dent al property
TRY 4,400 of the rental income derived in 2018 from residential real estate rentals is exempt from income tax. Tax returns do not have to be filed if there is an income less than this amount.
However, in cases where revenue exceeds the exemption but not declared or is declared deficiently, the exemption is removed. Furthermore, those who are obliged to declare their commercial, agricultural or professional profits with annual tax returns may not benefit from this exemption either.
On the other hand, of those who derive rental income from residential property exceeding the exemption amount, the total gross amount of whose incomes (wages, income from securities, income from real estate and other gains and revenues) exceeds TRY 120,000 may not benefit from this exemption either, regardless of their being subject to declaration or not.
In case taxpayers who are entitled to an exemption gain rent- al income from residential property exceeding the exemption amount, firstly the exemption amount (TRY 4,400) is deducted from the gross revenue, and then the amount which should be taxed (tax base) is calculated by deducting the expenses (actual or lumpsum expenses).
The income tax payable is calculated by applying the tax rates shown in the income tax tariff effective in 2018 to this amount.
B. Rental income from offices
In the declaration of rental incomes from offices that are subject to withholding tax, there is a “declaration limit” determined separately for each year. This limit is TRY 34,000 for rental incomes in 2018.
Accordingly, if the gross amount of rental incomes derived in 2018 subjected to withholding tax is lower than TRY 34,000, these incomes do not need to be declared. However, the total amount of other declarable incomes from marketable securities should be taken into account in addition to the incomes mentioned above.
If the gross rental income from the office exceeds the declaration limit, the whole income should be declared. The expenses would be deducted from the amount using one of the methods of lump-sum expense or actual expense, depending on the income recipient’s preference, in order to reach the tax base.
The taxes withheld within the year by the tenant may be deducted from the income tax calculated, according to the income tax tariff.
On the other hand, over the rent of the real estate rented as an office to taxpayers deriving business profits taxed under the simple procedure, income tax withholding is not applied by these taxpayers. The declaration limit for such rental incomes is TRY 1,800. All office rental incomes exceeding this amount in 2018 (that are not subject to withholding tax) need to be declared.
C. If off ce and house rental ncomes are comb ned
If rent is received both from a residential property and an office, whether the house rent will be declared should be checked first. Accordingly, if the house rents collected in 2018 by taxpayers exceed TRY 4,400, the additional income should be declared.
If the total gross amount of the rental income from the office that is subject to withholding and residential rental income exceeds the declaration limit of TRY 34,000, the office rental income should also be included in this declaration. On the other hand, if the total amount is less than TRY 34,000, only residential rental income shall be declared.
If a tax return is submitted due to rental incomes exceeding the exemption or declaration limit above, one of the methods of lumpsum or actual expense should be selected to calculate the net revenue, depending on the income recipient’s preference, and tax would be calculated over this amount according to the income tax tariff. When office rental incomes are declared, taxes withheld throughout the year by the tenant would be deducted from the tax calculated on the tax return.
D. Calculating expenses
Expenses that may be taken into account using the two different methods mentioned above: “lump sum expense” and “actual expense”. Taxpayers may choose the method they prefer.
1. Lump-sum expense method
In this method, 15 percent of the rent can be deducted directly as expense. If the income is partly exempt, the exemption amount should first be deducted from the total income and the 15 percent lump-sum expense should be deducted from what remains.
Since there are no exemption amounts for rents received from offices, 15 percent of the rent should be deducted as a lumpsum expense and the remaining amount should be declared. It should be taken into account that those who select this method may not revert to the actual expense method before two years.
2. Actual expense method
In the actual expense method, deductible expenses, which must be documented, are listed in article 74 of the Income Tax Law. However, since TRY 4,400 of revenue is exempt from tax in case of residential rental incomes, the part of the expenses corresponding only to the taxable gains should be calculated and deducted from the income. Deductible expenses are as follows:
a. Loan nterests
If the real estate acquired with a loan is rented, the interest paid for the loan can be deducted from the rental income. As a matter of fact, if the loan interest exceeds the rental income, this amount is deemed as surplus expense, which means that this part, which cannot be deducted from the rental income, can be deducted from other incomes declared.
b. F ve percent of the house purchase pr ce
Five percent of a residential real estate purchase price can be deducted as an expense for five years from the year of purchase. However, if the expense calculated in this way exceeds the renta; income derived, the exceeding part may not
be deducted from other in- comes or carried forward to following years.
c. Rent of houses occupied
Another actual expense item is the rent paid by those who rent the house they own and pay rent for another house they live in. The part of these rents corresponding to the non-exempt gains can be deducted from the revenue in accordance with the actual expense method. However, as explained above, if the expense exceeds the rental income, the exceeding part may not be deducted from other incomes or carried forward to following years.
d. Thermal insulation expenditures
Expenditures intended to ensure thermal insulation and energy savings, and increases the real estate’s economic value, made by the leaser may be deducted from rental income. On the other hand, in the circumstance that these expenditures exceed the amortization limit (TRY 1000) in a single calendar year, considering them as a cost is also possible.
e. Other actual expenses
►Lighting, heating, water and elevator expenses
►Taxes, duties, fees and goodwill paid along with insurance expenses
►Depreciation ( two percent)
►Repair and maintenance expenses
►Rents and other actual expenses paid by those who lease the property and rights they rent
II. REAL ESTATE SALES PROFITS
Gains derived from the sale of the real estate purchased, outside of the scope of the commercial activity by real persons, are deemed as “capital gains”. Under normal circumstances, these gains are subject to income tax, but income tax shall not be paid regardless of the amount of the income if the real estate acquired through inheritance or donation is sold.
A. Time of retention and its effect on taxation
In order not to pay taxes over the income in case of sale of real estate acquired through means other than inheritance or donation (acquired, constructed, etc.), the real estate must have been retained for at least five years. In other words, in case the real estate is sold after being retained for less than five years, income tax must be paid over the gains derived in principle. The five-year period is calculated in days.
The effect of inflation can be eliminated during the calculation of the gains that are generated from real estate sold before expiration of the five-year period and that must be declared. This is called “indexation”. The Turkish Statistical Institute (TSI) announces the domestic producer’s price indices (D-PPI) used in the calculation of the inflation of the previous month at the beginning of each month. These D-PPIs must be used in the indexation relating to real estate sold in 2018.
The rate of increase between the index of the month prior to the month when the real estate is sold and the index of the month prior to the month it is purchased is calculated. A new cost price is determined by increasing the purchase price at this rate. The amount remaining after deducting the expenses, if any, from the difference between the new cost price and the sales price calculated in this way is deemed as net profit. However, the index difference must be more than 10 percent in order to benefit. Otherwise, the profit must be calculated by deducting the initial purchase price and expenses from the sales price.
C. Exempt on implementation
TRY 12,000 (for 2018) of the gains generated from the sale of a real estate in five years is exempted from income tax. A tax return shall not be submitted and therefore tax shall not be paid ,in case the gains calculated after indexation, if indexation is possible, or the difference between the sales and purchase price, if indexation is not possible, is less than TRY 12,000.
III. TAX RATE, DECLARATION AND PAYMENT
A. Income tax rate
Income tax is applied at increasing rates. If tax return is filed for incomes derived in 2018, the tax must be calculated according to the following income tax tariff (except employment incomes).
B. T me of declarat on
Real persons must declare the rental income they derive or the gains they generate from the sales of real estate, with an annual income tax return between the first and 25th days of March in the following year. Accordingly, the said incomes derived in 2018 must be declared by Monday March 25, 2019 starting from March 1, 2019.
C. Method of filing the tax return
The annual income tax return for rental incomes or real estate sales profit can be filed manually by going to the tax office. These tax returns may be sent by mail as well.
As of 2012, taxpayers who have no declarable income other than rent were also able to submit their tax returns without going to the tax office, using the “Prepared Rent Declaration System”, if they wished. The scope of this system has been expanded and the “Prepared Declaration System” has been implemented effective from March 1, 2016.
Accordingly, income taxpayers whose incomes are comprised only of salary, rent income, income from securities and other gains and revenues or several or all of these items may submit their declarations pertaining to such incomes through the “Prepared Declaration System” which is prepared in advance by the Revenue Administration and then submitted to the approval of taxpayers.
Taxpayers may log into the system via the Administration’s website, www.gib.gov.tr, by replying to the security questions or by using their Internet Tax Office passwords.
D. Payment deadlines
The first installment of the income tax calculated on the tax return must be paid in two equal installments, the first one by the end of March and the second one by the end of July.
Accordingly, the first and second installments of the income tax calculated on incomes declared for 2018 must be paid:
• By Monday, April 1, 2019 (because March 31 corresponds to a Sunday)
• By Wednesday, July 31, 2019