Tax consequences of selling a property in Poland and abroad – what should a Polish resident know?

In recent years, more and more Poles have decided to invest in foreign real estate. The motives for buying vary – for some it is an investment, for others a way to own a second home in a tourist attraction.

However, when the time comes to sell the property, the question arises: what are the tax consequences of such a transaction for a Polish tax resident? Does the location of the property matter – in Poland or abroad? Contrary to appearances, the answer is not as simple as it might seem. Both the provisions of the Polish Personal Income Tax Act (PIT) and double taxation agreements (DTA) come into play. The so-called 5-year rule and the possibility of claiming a housing allowance are also of key importance. Let’s take a closer look.

The 5-year rule – when do you avoid tax?

According to Article 10(1)(8) of the PIT Act, the sale of real estate is taxable if it takes place within 5 years from the end of the year in which it was acquired. If this period expires, the transaction does not give rise to a tax liability in Poland. This means that a person who sells a property after 5 years does not have to pay income tax in Poland, regardless of whether the property is located in Poland, Spain, France or Thailand.

However, if the property is sold before this period has elapsed, the Polish tax resident must pay 19% income tax on the difference between the sale price and the purchase price, plus the acquisition costs and any expenses incurred for the property.

Avoiding double taxation

When selling a foreign property, the first thing to check is where the income is taxable. Poland has concluded many double taxation agreements, which usually state that income from the sale of real estate is taxable in the country where the property is located. This means that if, for example, a Pole sells a flat in Germany, income tax should be declared and paid in Germany, according to local regulations.

However, as a Polish tax resident, the seller must also declare the income in Poland. Depending on the specific DTT:

• • the tax paid abroad can be deducted from the 19% tax due in Poland (proportional deduction method, applicable, among others, in the DTT concluded between Poland and the USA, Spain, Great Britain, Bulgaria) or
  • the sale of a property may be completely exempt from taxation in Poland (the exemption with progression method, applicable, among others, in the DTT concluded between Poland and Germany, France, Switzerland).

How and where to declare income from the sale?

Income from the sale of domestic and foreign real estate should be declared in the annual PIT-39 tax return, unless the exclusion with progression method applies. The deadline for submitting the return and paying the 19% income tax is 30 April of the year following the sale. In this tax return, you can also take advantage of the so-called housing allowance if certain conditions are met.

Where can you buy a property to take advantage of the allowance?

Polish regulations allow for exemption from tax on income from the sale of real estate if the funds obtained are used for one’s own housing purposes within three years from the end of the year in which the sale took place (Article 21(1)(131) of the PIT Act).

According to the regulations, confirmed by the practice of the Polish tax authorities, we can realise our own housing purposes both by purchasing real estate located in Poland and in other countries of the European Union and the European Economic Area (EEA). However, it is important that the purchased property serves the taxpayer’s housing needs, although this does not mean that this goal must be realised 365 days a year. This is also confirmed by tax interpretations, e.g. the Director of the National Revenue Information Service in the interpretation of 10 May 2024. (no. 0115-KDIT3.4011.369.2024.1.RS), where the taxpayer allocated funds to purchase an apartment in Spain and lived there for several months during the autumn and winter period.

Examples of the application of the housing allowance

1. 1. Sale of an apartment in the USA and purchase of a house in Poland
      Mrs Maria, a Polish tax resident, sold her apartment in Chicago within 5 years of purchasing it, thus generating income. As the amount of tax paid in the USA was lower than the Polish personal income tax rate of 19%, Mrs Maria should have paid the difference in Poland. To avoid paying tax, she decided to use all of her income to buy a house in Warsaw, thus benefitting from the housing allowance.
   2. Selling an apartment in the UK and buying an apartment in Portugal
      Michael sold his London apartment four years after buying it, thus generating taxable income. He used the proceeds from the sale to buy an apartment in Lisbon, which he intended to use as his place of residence for a few months a year, without giving up his main apartment in Poznań. As Portugal is a member of the EU, he was able to take advantage of the housing allowance and avoid taxation in Poland.