Save on tax on rental income

When you do not need to file a tax return for rental income

There are situations in which you do not need to deal with a tax return for rental income at all:

• you have no other income and your rental income does not exceed CZK 50,000.
• while employed, your rental income did not exceed CZK 20,000

How to calculate income tax on rental income

As an individual, you pay tax on rental income at a rate of 15%. No health or social insurance contributions are payable on rental income.

• Add up your rental income, counting only the net rent and excluding energy and utility charges.
• Count only the rent you actually received in the relevant year; for example, you do not take into account that a December payment was for January of the following year.
• Deduct expenses from your income to arrive at the tax base, from which you calculate the tax.

There are two ways to claim expenses: actual expenses or flat-rate expenses. Let us look at which method is most suitable for you.

Actual vs flat-rate expenses

You can include all expenses related to generating rental income as costs. You can choose between two options:

Actual expenses – actual costs which you must be able to substantiate.

Flat-rate expense allowance – 30% of income, with no need to substantiate actual costs; administratively simple, but it may not be financially worthwhile. 

When flat-rate expenses are worthwhile for rental income

The flat-rate expense allowance can be claimed at 30%, up to a maximum of CZK 600,000. If income exceeds CZK 2,000,000, you can still claim only CZK 600,000 in expenses. Flat-rate expenses are particularly worthwhile if:

• You have low income and therefore low or no tax liability.
• You acquired the property as a gift that was exempt from income tax, for example a gift from family. You will not be able to claim property depreciation, which usually represents the largest expense item.
• The flat is cooperatively owned – you cannot claim depreciation (although the cooperative can).
• You have low expenses associated with renting out the property

When actual expenses are worthwhile for rental income

In other cases, it is highly likely that claiming actual expenses will be more worthwhile for you. It involves more work, but can save you thousands of crowns in tax. As a landlord, this administration may put you off, but do not be concerned – it need not be complicated at all.

Claiming actual expenses is particularly worthwhile if:

• You have high costs associated with renting out the property.
• You bought the flat – you can claim property depreciation.
• You invest significantly in repairs, refurbishment or furnishing the property.

What can be included as expenses?

Property depreciation – this often represents the largest expense item. It spreads the acquisition cost, as an expense, over several years.

Flat furnishings – the limit is CZK 80,000; above this amount, the asset must be depreciated over at least 3 years, depending on the depreciation group to which it belongs.

Refurbishment – you can claim construction work that enhances the property up to a limit of CZK 80,000. For a higher amount, it must be added to the value of the property and depreciated gradually over the years.

Repairs – you can claim any amount for repairs that restore the property to its original condition and do not enhance its value.

Travel expenses – actual or flat-rate expenses may be claimed. When using the flat-rate allowance, you must own the car.

• If you use the car solely in connection with the property, you can claim flat-rate expenses of CZK 5,000 per month,
• ​​if you also use it privately, you can claim 80% of the flat-rate allowance, i.e. CZK 4,000 per month.

Mortgage interest or interest on any loan used to finance the property or its repair.

Real estate agency or legal fees – for example, costs associated with finding a new tenant for the flat.

Property tax – provided it has already been paid.

Property insurance.

Example 1: Tax calculation using the flat-rate expense allowance

The owner rents out a flat with annual rental income of CZK 300,000. They decide to claim flat-rate expenses of 30%.

1. Calculation of flat-rate expenses
   • 30% of CZK 300,000 = CZK 90,000
2. Tax base
   • Rental income – Flat-rate expenses
   • CZK 300,000 – CZK 90,000 = CZK 210,000
3. Tax calculation
   • 15% of the tax base
   • 0.15 × CZK 210,000 = CZK 31,500

When using flat-rate expenses, the owner will pay tax of CZK 31,500.

Example 2: Tax calculation using actual expenses

The owner rents out the same flat with an annual rental income of CZK 300,000, but claims actual expenses.

Expenses:

• Property insurance: CZK 10,000
• Property tax: CZK 5,000
• Real estate agency fees: CZK 10,000

Property depreciation:

The acquisition price of the property is CZK 8,000,000, classified in the 5th depreciation group, with a rate of 1.4% in the first year and 3.4% in subsequent years.

• in the first year: 1.4% of CZK 8,000,000 = CZK 112,000
• in subsequent years: CZK 8,000,000 × 3.4 / 100 = CZK 272,000

Total actual expenses: CZK 25,000 + depreciation

1. Tax base:
   • Tax base = Rental income – Actual expenses
   • Tax base in the first year: CZK 300,000 – CZK 137,000 = CZK 163,000
   • Tax base in subsequent years: CZK 300,000 – CZK 297,000 = CZK 3,000
2. Tax calculation:
   • Tax = 15% of the tax base
   • Tax in the first year: 0.15 × CZK 163,000 = CZK 24,450
   • Tax in subsequent years: CZK 0

When using actual expenses, the owner will pay tax of CZK 24,450 in the first year of depreciation. This alone makes it more worthwhile than the flat-rate method. In subsequent years, they will pay CZK 0 in tax.

Example 3: Tax calculation where depreciation cannot be claimed

Let us also consider a case where the owner cannot claim depreciation. Depreciation cannot be claimed when renting out a cooperative flat or a flat acquired as a tax-exempt gift, for example as a gift from relatives.

The owner rents out a flat received as a gift from their parents. The annual rental income is CZK 300,000. Their actual expenses include:

• Car – flat-rate transport allowance of CZK 4,000 per month: CZK 48,000
• Property insurance: CZK 10,000
• Property tax: CZK 5,000
• Real estate agency fees: CZK 15,000
• Total actual expenses: CZK 78,000
• Rental income tax: CZK 33,300
• Using the flat-rate method: flat-rate expenses of CZK 90,000 –> tax of CZK 31,500

In this case, claiming actual expenses is not worthwhile for the owner. They will pay CZK 33,300 in tax. Using the flat-rate expense allowance, they will pay lower tax of CZK 31,500. Actual expenses would be worthwhile if costs were higher, such as for repairs, major renovations, etc.
 

TIP: You can also use our tax calculator for the calculation.

We recommend preparing an overview of all expenses associated with renting out your property. You can then decide whether to claim actual or flat-rate expenses based on your specific circumstances, after considering both options.

We recommend not reporting a loss, i.e. having higher costs than income, otherwise the tax authority's audit period is extended retrospectively to 8 years. Alternatively, you can defer certain expenses until the following year or postpone property depreciation.

1. Start keeping records.

A pen and paper will do just fine.

• Record your income and expenses – how much, when and what for.
• Keep the necessary documents, such as receipts and proof of payment, for example a bank statement. 
• Records of receivables and debts.

2. Determine the property's acquisition value.

If you purchased the property within the last 5 years, you can use the purchase price, including ancillary costs associated with acquiring the property. If it was purchased longer ago, you will need to have its value determined by a valuer – the so-called replacement value.

You must have documents proving the amount of the acquisition value available in case of an inspection. Please note that land cannot be depreciated, as it has an unlimited useful life. If the purchase price also included the value of the land, this must be deducted. In this case, you will need an expert valuation. 

3. Calculate the depreciation amount. 

Classify your property into a depreciation group, according to Appendix 1 to the Income Tax Act. Use the depreciation rate for the relevant group to calculate the annual depreciation from the property's acquisition value. Create a table showing depreciation apportioned across the individual years.

Overview of depreciation groups  

Table of depreciation rates

Your property will most likely fall into the 5th depreciation group, meaning you will use the following formula:

• First year: acquisition cost x 1.4 / 100
• subsequent years: acquisition cost x 3.4 / 100

We believe this article has provided you with clear information about the taxation of rental income. Please bear in mind that every situation is individual and various factors may affect which tax option is most advantageous for you. If you are unsure or have further questions, do not hesitate to consult a tax adviser, who can help you find the most suitable solution. This can help you save not only money, but also a great deal of time and worry in the future.