Tenancy agreement

By law, a tenancy agreement does not have to be concluded in writing, but unless you are letting the property to family, I would recommend having the agreement in writing. The written agreement should contain:

  • identification of the owner – first name and surname, personal identification number, permanent address
  • identification of the tenant – first name and surname, personal identification number, permanent address
  • the exact address and description of the premises being let – for a flat, include its number and, where relevant, specify which parts are included in the tenancy and which are not (a floor plan with the areas being let shaded in can be particularly helpful)
  • the period for which the agreement is concluded – if omitted, it is automatically treated as indefinite
  • the rent and utility payments – the agreement must state how much the tenant must pay, when and where (and, where applicable, the refundable deposit and other financial terms)

These days, as well as lawyers, some websites can help you prepare the agreement. Personally, I like the interactive service Legito. 

Do I need to register a trade?

No. You do not have to report the start of letting anywhere, register a trade or do anything similar. You neither pay nor remit health or social insurance on this income.

There is also a trade licence for letting property, but if this is supplementary income, I recommend not registering for it, particularly because you can avoid paying the insurance contributions mentioned above. If it were your only income, the situation would be different. However, this always needs an individual assessment.

From an income tax perspective

You have a tenant and everything is working nicely. As the end of the year approaches, though, you start wondering how to tax your rental income? Let us take a look. 🙂

The crucial thing is knowing how much rent you received over the whole year. You can obtain this figure retrospectively for the whole year from online banking. For a clearer overview, though, I recommend keeping simple records in Excel, noting how much you received from tenants for rent and utilities, and when, month by month.

Utility advance payments – 3 options

Transfer utility advance payments to the tenants. From your perspective, this is the simplest option: everything bypasses you. Apart from transferring the accounts, it removes the administration involved in paying advances and reconciling them with tenants. However, I recommend this option for tenants you expect to stay long term, so you are not arranging transfers every year. It also avoids having to pay for electricity to be reconnected if it is cut off because tenants fail to pay. 

Utility advances go through you, and you reconcile every last penny with the tenants. In this case, tenants first pay advances to you (often together with the rent), and you then forward them to the utility providers’ accounts. If you always settle the annual reconciliation in full with the tenants (refund the overpayment or collect the shortfall), the utility payments collected do not count as your income – you are merely an intermediary. 

Utility advances go through you, and you keep small profits. This is similar to the previous situation, except that, for example, you keep part of the annual overpayment or tenants send rounded advance payments. In these cases, you retain a small profit and must therefore include all advances received from tenants as income in your tax return. 

Deposit

In most cases, you will want tenants to pay a deposit before moving in. This deposit is not income for your tax return – it is merely a refundable advance. If, when tenants leave, you use the deposit to pay for repairs necessitated by damage they caused, the deposit becomes part of your income in that year. 

Expenses

The situation is similar to self-employment: the law allows you to report actual or lump-sum expenses. The difference from self-employment is that rental income falls under Section 9 of the Income Tax Act. This means it is a different category of income from self-employed business activity itself. This is also why the income is not subject to health and social insurance contributions. As with self-employment, only rent actually received from tenants, whether into your account or in cash, belongs in your tax return. Rent arrears are included only in the year in which the tenants pay them.

Actual expenses

For actual expenses, I recommend keeping receipts and invoices relating to the letting (repair and furnishing expenses) in a folder throughout the year. Tax depreciation of the property itself can also be a fairly significant expense. What does this mean? You spread the purchase price, including incidental acquisition costs (estate agent’s commission, formerly property acquisition tax, renovation), over 30 years. Each year, you can claim 1/30 as depreciation as a tax-deductible expense. If you acquired the property more than 5 years ago, you may not use the purchase price. In that case, have an expert valuation prepared to establish the depreciation value. 

Lump-sum expenses

By contrast, lump-sum expenses are fixed and very simple: they equal 30% of income. This means that with lump-sum expenses, you pay 15% tax on 70% of your income. 🙂 

At the end of the year you can then easily decide which type of expenses to claim to keep your tax burden as low as possible. If you choose actual expenses and want to claim depreciation, I recommend contacting a capable accountant or tax adviser, at least in the first year. Pitfalls can arise that are beyond the scope of this article. 🙂

Letting and VAT

Do you let several properties, with your income over the last 12 months approaching CZK 1 million? Then you will certainly be interested to know that letting is exempt from VAT. If you have no other business activities alongside letting, you will not become VAT-registered even if you exceed the magic CZK 1 million threshold. The same applies if, alongside letting, you are employed, receive capital income such as share dividends, or have occasional income (from selling shares or property).

If, on the other hand, you also run a business alongside letting, you will become VAT-registered, but you will pay VAT only on your business activities that are not exempt. 

Recently, many people have been investing in property precisely because its value is rising. If you find pleasant, reliable tenants, there really is nothing to worry about. Your flat or house will not only earn you ongoing income, but its value will keep growing too. If you are unsure what to do, please get in touch and we can look at it together. 🙂