Income tax (in Latvian: ienākuma nodoklis) is a tax paid on any income received by a person. It is also applicable in cases when you sell a real property, and it is applied as a capital gains tax. The tax is paid only on the difference between the selling price and the buying price. In this case, the base tax rate is 20%. The same goes for renting the property out - in this case the tax is 20% to 31.4% (or the lowered rate of 10%) on the income gained. Below you can see the rate brackets.
|Less than 20 004 EUR||20%|
|The part equal to or higher than 20 004 EUR but lower than 55 000||23%|
|The part equal to or higher than 55 000||31.4%|
While in most cases the value of the income from selling is pretty straightforward - the selling price minus the buying price - there are cases, in which different principles apply. These deal with inherited and gifted properties.
If the real estate is inherited rather than bought, its value is assumed to be the one indicated in the testament (inheritance documents). If the value is not indicated in the testament, there are two ways of calculating it:
- If inherited before December 31, 2000
- The cadastral value of the property in the year of sale is divided by the consumer price index determined by the government for the same year. The result is then assumed to be the purchase value, which subsequently is subtracted from the sale price, and the difference is taxed.
- If inherited after December 31, 2000
- The cadastral value of the property in the year of inheriting is assumed to be the purchase value, which subsequently is subtracted from the sale price, and the difference is taxed.
If the real estate is a gift, then its purchase value is assumed to be the value indicated in the gifting contract. If no value is indicated, there are, again, two options, which are the same as in the case of inheritance. It should be noted that, if the real estate is gifted by a person that is not one’s relative, an income tax of 23% from the value of the property must be paid.
Another case is when the real estate is received as a gift from a relative. If:
- the real estate is received from a person related to the third degree (according to the Civil Law (in Latvian: Civillikums) of Latvia), and
- the real estate is sold in the span of 60 days since its registration in a Land Book as a property of the seller
Then one of the three options is applied:
- If originally purchased after December 31, 2000 and a document proving its purchase value is present
- The value indicated in the document is assumed to be the purchase value.
- If originally purchased after December 31, 2000 and there are no documents proving its purchase value.
- The cadastral value of the real estate for the year it was registered in a Land Book as a property of the gift giver is assumed to be its purchase value.
- If originally purchased before December 31, 2000
- The cadastral value of the real estate for the year it was gifted divided by the consumer price index for 10 years before the transfer of ownership rights is assumed to be its purchase value.
If you rent out a property, you have two options (modes) of paying the income tax: the regular and simplified. In the regular mode, you pay the income tax according to your income bracket (see the table above), and it is paid on the difference between your business income and your business expenses. If you choose to pay in a simplified mode, the tax rate is lowered to 10%, but it is paid an all the income, disregarding the expenses.
The mode you choose is important not only for maximizing your profit, but also for cases when you plan to later sell the property you are renting out. If you choose the regular mode, the time you are renting the property out is not counted towards you being a declared resident of that property. In the simplified mode, it is counted towards this time. This, in turn, may influence your eligibility for tax exemptions when you sell this property, because in order to be exempt, you need to be a declared resident of the property for a certain length of time before selling it (a detailed description of this system can be found below.).
The primary way of receiving an income tax deduction is to make improvements to the property while it is in your possession. Any sum invested in the real estate will be deducted from the taxable income once you sell the property. Naturally, these expenses must be proven by relevant documents.
The income tax from selling a property is not applicable (i.e. the seller is exempt from it) in the following cases:
- the real estate has been serving as a primary place of residence of the seller for more than 60 months and, out of them, at least 12 consecutive months, since the moment of its registration in a Land Book as the seller's property until the moment the sale contract is signed. Whether it was indeed the primary residence is determined by the declared residence address of the seller
- the real estate was the only place of residence of the seller for more than 60 months and at least for 60 consecutive months before the sale contract is signed
- the real estate has been the only registered immovable property of the seller, and the income from its sale is invested into a functionally similar property in the next 12 months after the sale contract is signed