Real estate transactions are traditionally among the most sensitive in both legal and tax aspects. Special attention is required when a purchase and sale agreement is terminated after the transfer of ownership. In this case, a number of questions arise: whether this is considered a sale, whether taxable income arises, and by what rules it is calculated. The important tax consequences of terminating a real estate purchase and sale agreement between resident individuals, taking into account the norms of the Tax Code of Ukraine and civil legislation, are discussed below.
Features of relations under a purchase and sale agreement
According to Article 655 of the Civil Code of Ukraine (hereinafter – the Civil Code), under a contract of sale, one party (the seller) transfers or undertakes to transfer property (goods) into the ownership of the other party (the buyer), and the buyer accepts or undertakes to accept the property (goods) and pay a certain amount of money for it.
Ownership and other property rights to immovable property, encumbrances of these rights, their emergence, transfer and termination are subject to state registration (Article 182 of the Civil Code).
Item 2 of Article 2 of Law of Ukraine No. 1952-IV of July 1, 2004 “On State Registration of Real Rights to Real Estate and Their Encumbrances” stipulates that state registration of real rights to real estate and their encumbrances (hereinafter – state registration of rights) is the official recognition and confirmation by the state of the facts of acquisition, change or termination of real rights to real estate, encumbrances of such rights by making relevant entries in the State Register of Property Rights.
According to Article 3 of Law No. 1952, state registration of rights, including to real estate, which is mandatory under Law No. 1952, arises from the moment of such registration.
Tax consequences of terminating a purchase and sale agreement
Article 651 of the Civil Code defines the grounds for amending or terminating a contract. In particular, termination of a contract is permitted only by consent of the parties, unless otherwise established by the contract or law.
The procedure for taxation of income of individuals is regulated by Section IV of the Tax Code, and according to item 163.1.1, the object of taxation of a resident is the total monthly (annual) taxable income. The total monthly (annual) taxable income of a taxpayer includes, in particular, a part of income from property transactions, the amount of which is determined in accordance with the provisions of Article 172 of the Tax Code item164.2.4 of the Tax Code).
Taxation of transactions on the sale (exchange) of real estate objects is regulated by Art. 172 of the Tax Code. In accordance with item 172.8 of the Tax Code, for the purposes of Art. 172 of the Tax Code, sale means any transfer of ownership or any other similar rights to real estate objects, an indivisible object of unfinished construction/a future real estate object, a divisible object of unfinished construction, except for their inheritance and donation. That is, termination by individuals - residents of the purchase - sale agreement of a real estate object (land plot), as a result of which the transfer of ownership occurs, is the sale of such an object.
According to clause 172.1 of the Tax Code, income received by the taxpayer from the sale (exchange) of property is not taxed once during the reporting tax year, provided that such property has been owned by the taxpayer for more than three years:
- residential building, apartment or part thereof, room, garden (summer) house (including an object of unfinished construction of such objects, a land plot on which such objects are located, as well as household structures and buildings located on such a land plot);
- land plot that does not exceed the norms of free transfer, defined in Article 121 of Land Code of Ukraine No. 2768-III of October 25, 2001, depending on its purpose;
- agricultural land plot directly acquired by the taxpayer in the process of privatization of land of state and municipal agricultural enterprises, institutions and organizations or privatization of land plots that were in use by such taxpayer, or allocated in kind (on the ground) to the owner of a land share (share), as well as such land plots received by the taxpayer as an inheritance.
The condition that such property must be owned by the taxpayer for more than three years does not apply to property received by the taxpayer as an inheritance.
Income from the alienation of household structures located on the same plot with a residential or garden (summer) house and sold together with it for taxation purposes is not separately determined. However, according to item 172.2 of the Tax Code, income received by the taxpayer from the sale during the reporting (tax) year of a second real estate object (except for transactions on the alienation of residential real estate by banks in the procedure for recovery under mortgage agreements securing a loan granted in foreign currency), from those specified in item 172.1 of Article 172 of the Tax Code, or from the sale of a real estate object not specified in item 172.1 of Article 172 of the Tax Code, is subject to taxation at the rate of 5%, specified in item 167.2 of the Tax Code.
Income received by a taxpayer from the sale during the reporting (tax) year of the third and subsequent real estate objects (except for transactions on the alienation of residential real estate by banks in the procedure for foreclosure under mortgage agreements securing a loan granted in foreign currency), from those specified in item 172.1 of the Tax Code, or from the sale of the second and subsequent real estate objects not specified in item 172.1 of the Tax Code, is subject to taxation at the rate of 18% specified in item 167.1 of the Tax Code, except for cases where the property specified in this paragraph was received by the taxpayer as an inheritance.
Income received by a taxpayer from the sale during the reporting (tax) year of an indivisible object of unfinished construction / future real estate object, a divisible object of unfinished construction and from the assignment of rights under a contract of sale of an indivisible object of unfinished construction / future real estate object, for which the price has been partially paid and an encumbrance of real rights in favor of the buyer has been registered, is subject to taxation at the rate of 18%, specified in item 167.1 of the Tax Code, except for cases where the property and property rights specified in this paragraph were received by the taxpayer as an inheritance.
Income received by the taxpayer from the sale during the reporting (tax) year of the third and subsequent real estate objects in the form of inherited real estate objects, as well as income from the sale during the reporting (tax) year of an indivisible object of unfinished construction / future real estate object, a divisible object of unfinished construction and/or from the assignment of rights under a purchase and sale agreement of an indivisible object of unfinished construction / future real estate object, for which the price has been partially paid and an encumbrance of real rights in favor of the buyer has been registered, provided that such property, property rights were received by the taxpayer as an inheritance, is subject to taxation at the rate of 5%, determined by item 167.2 of the Tax Code.
Also, the specified income is subject to military tax (point 1.2, item 161, section 10, chapter XX "Transitional provisions" of the Tax Code). The military levy rate is 5% of the taxable amount, determined by point 1.2, item 16 1, section 10, chapter XX "Transitional provisions" of the Tax Code( point 1.3, item16 1, section 10, chapter XX “Transitional provisions” of the Tax Code).
Therefore, in the event of termination of a real estate purchase and sale agreement concluded between resident individuals, resulting in a transfer of ownership, the income received from such a sale is subject to personal income tax and military levy on the general grounds specified in Article 172 of the Tax Code.
