How Private Owners Will Be Paying Tax When Renting Out A Budapest Property In 2014?
By Dezso Papp on January 10, 2014.
Only death and taxes are certain as Benjamin Franklin is often quoted. Well in Hungary one of these are changing every year without fail. Sadly enough, it is not death. This is just one of the many special flavours to the Hungarian business goulash.
Is this information important for you?
It only make sense to get to know about the basics or rental taxation for all parties involved in rental deals. Thus, if you take any sort of responsibility in residential rental deals this year then the answer must be: yes. HR and Finance people are interested in the technicals, such as 'Do we still have to pay the taxed directly to the NAV (National Tax and Customs Authorities of Hungary)'? Yes, but please read on if you have time. Private tenants will want to seek information for the initial or yearly rent adjustment negotiations. Foreign landlords might be interested to get some input or new ideas they can follow up with their property manager / accountant.
Basics of long-term property rental taxes in Hungary
The last major change - the unification of rental income into a total taxable income base - happened only 3 years ago. N.B. short term/holiday rentals were still taxed separately. The average effective tax rate was 20,32% in 2011. The same (20,32%) or better at 16% in 2012 depending on the total yearly rental income. Then it has dropped to 16% in 2013.
Ways of cost deductions
There is a simple cost deduction path that takes 10% as an average cost and taxes the remaining 90%.
The other path involves detailed costing. If the latter scheme is chosen typically the fixed assets up to a per item value of HUF 100 thousand and their maintenance or mending costs are deductible. The utility and running costs if the rent includes them (say in an all inclusive deal) are also deductible from the tax base.
As a rule of thumb rents are exempt of VAT. Yet the owner has the right to choose to rent with VAT (27% in 2014 as well,) in case - say - there are considerable costs and the VAT reclaiming seems beneficial).
Also, if the VAT scheme have been chosen the owner must raise an invoice, otherwise a proper receipt based on the requirements accounting act suffice.
'Eho' (Medical Contribution)
The 14% Medical Contribution is another tax like cost that need to paid beside the tax itself. It is due on the rent above HUF 1 million per year. Also the total payable Medical Contribution has an upper limit HUF 450 thousand per year.
Got a great question from a reader if you as a foreign owner of a Hungarian property can avoid paying health care contribution. The answer is yes. If you are not residing in Hungary (as directed by the concerning rules).
Changes that came into effect on 1 Jan 2014
Most notable is that from 1 Jan 2014 Medical Contribution can also be a cost element if the owner chooses the detailed costing path. Saving the owner a maximum 14% from the tax base depending on the rent. This brings down the effective tax rate to 14,4% from 16% in 2013. A clear 10% more left in owners' pockets within a certain rent range.
Before 1 Jan 2014 if the owner has chosen rentals with VAT though they have had to stick with it for 5 years. Now, it is possible to change earlier. If it makes sense.
Not about rental but from an owner's perspective it is interesting. That it is no longer a tax favorable option to sell properties owned as a company via selling the company (shell). As if the book value of the property is representing more than 75% of the total book value of the company the buyer has to pay stamp duty.
Thanks for reading,
P.S. Feel free to comment...