On 25 February 2025, the Supreme Administrative Court issued a judgment (reference number II FSK 823/22) that calls into question the correctness of the PIT settlements of many people operating in the flipping industry - in particular those for whom earnings from this source were not a permanent, primary source of income and did not report them in their business settlements.
The cited judgment questioned the PIT settlements of a taxpayer who, in the years 2014-2016, successively searched for, purchased, carried out renovation and modernization works and sold at a profit 4 apartments, with the difference between the purchase price and the sale price of each of them being PLN 85, PLN 000, PLN 97 and PLN 000, respectively.
Below we discuss the details of this case and answer any questions that may arise.
- What are the tax consequences for people who have not registered their business and whose sales are deemed to be business activities?
The verdict is important for pinball players, but it must be categorically stated that it concerned a specific situation in which the institution of the so-called housing relief was abused.
The taxpayer, when settling PIT from these transactions, declared that she was allocating the income for her own housing purposes. Thanks to this, the income from the sale (which would be taxed under PIT) was exempt from PIT.
In other words, the factual situation in which a taxpayer owning one apartment in which he meets his own housing purposes decides to invest in the purchase of a residential property as a commercial commodity, with the intention of renovating it and reselling it at a profit is one thing, and the case examined by the Supreme Administrative Court is another.
In such a case, it would not be possible to use the housing relief – the taxpayer would not declare that he/she is using the funds obtained from the sale for his/her own housing purposes, which is what the taxpayer did in the case in question. In the case of "standard" investments, the dispute will focus on whether the sale:
- is taxed as a so-called private sale, outside the scope of business activity – without PIT if 5 years have passed since the end of the calendar year in which it was acquired or, if 5 years have not passed, taxed at the rate of 19% PIT on revenue reduced by expenses for purchase, renovation works, etc.?;
- It is included in the business activity and the taxpayer settles it on the principles appropriate for the chosen form of taxation (lump sum, linear, scale), and if he has not registered the business activity, then on the tax scale using the rates of 12% up to PLN 120 of income, 000% from the surplus above PLN 32, and an additional 120% solidarity levy above PLN 000 of income. In addition, he will have to pay 4% health insurance contribution from income and sometimes also VAT. Each of the arrears will be assessed with interest.
- Can a one-off sale of a renovated apartment be treated as a business activity?
In my opinion, in such a case, the position of "private sale" can be defended. The NSA raised this issue, considering that the number of transactions made is not crucial in drawing the line between "private" and business sale. What is crucial is to determine whether the activity is:
- conducted in one's own name regardless of its outcome,
- gainful,
- performed in a manner organized and continuous.
In my opinion, the key defensive measure for taxpayers will be the argument about the lack of "continuity", which the Supreme Administrative Court in its judgment of 10 October 2024, reference number II FSK 74/22 understands as follows:
"This premise aims to eliminate the concept of economic activity one-off projects (or those undertaken sporadically). However, it should not be understood as the need to carry out activities without interruption (e.g. throughout the year, throughout the month, and even less so throughout the day). The intention to repeat certain activities is important in order to generate income (e.g. repeat purchases and then their subsequent sale).”
In the case which resulted in the commented judgment of the Supreme Administrative Court, a number of circumstances were examined before it was found that the earnings from the sale of real estate were obtained from business activity.
The sale of the real estate took place after a period of 3 to 7 months from the purchase, the difference between the purchase price and the sale price of each of the four apartments was from PLN 85 to PLN 000, and the taxpayer financed the transactions with a loan (she also had 102 long-term loans). The taxpayer explained that the apartments were purchased for her own needs and then sold as a result of a change in circumstances, i.e. no one willing to rent them (until her son came of age, who according to the taxpayer was to live there) or her divorce.
In my opinion – based on publicly available materials – a thorough evidentiary proceeding was conducted in this case, as a result of which it was correctly found that the taxpayer was selling real estate within the scope of her business activity.
- What actions can be taken to avoid sales being classified as a business activity?
Each case should be assessed individually due to the vague criteria of economic activity in the Personal Income Tax Act. The Supreme Administrative Court indicated that the number of transactions is not a decisive criterion. The risk of questioning a "private sale" can be reasonably identified even with two transactions.
It is difficult to indicate criteria that clearly minimize this risk, but in my opinion the following arguments may be helpful:
- the taxpayer is supported mainly by another activity, and the income from such an investment is a side income,
- investments are not a permanent element of the taxpayer's activity,
- the way of carrying out the investment differs from the standards appropriate for professionals
(e.g. lack of involvement of several renovation teams at the same time in the renovation, lack of permanent business relations with contractors of renovation and modernization works, lack of a credit line).
- Can the judgment also result in inspections of transactions made several years ago?
It may very well be so. We have a limitation period of several years, counted as 5 years from the end of the calendar year in which the tax payment deadline expired. Therefore, the PIT for 2018 (its payment deadline was the end of April 2019) and previous years are "safe" from the point of view of a potential audit.
- What could be the long-term consequences of this ruling for the real estate market and investors?
I believe that the commented judgment will lead to greater professionalization of the market, and therefore more frequent settlement of income from the sale of real estate in the source of economic activity and, therefore, less interest among investors in settling income from "private sales". As a result, this may balance competition between investors and perhaps increase prices, as some investors will have to include new, additional tax costs in their economic calculations.
Author Dominik Szlęzak, tax consultant at BTTP
