Depreciation from Rental Income and Expert Valuation Report
Depreciation from rental income is governed by Section 9 of Act No. 586/1992 Coll., on Income Taxes.
The tax base consists of income (rent) reduced by actual expenses incurred to generate that income. If the taxpayer does not claim proven expenses, they may apply a flat-rate expense of 30% of the income.
The Income Tax Act sets the maximum flat-rate expense at CZK 600,000, corresponding to an annual rental income of CZK 2,000,000.
It pays off to claim actual expenses
The main deductible expense is usually the depreciation of the property. Real estate is typically depreciated over 30 years (for hotels or historical buildings, over 50 years). In the first year, 1.4% of the acquisition cost is depreciated, and 3.4% in each of the following 29 years — a total of 100%. If the property is owned jointly by spouses, only one of them reports the rental income.
The basis for depreciation is either the purchase price or the replacement (reproduction) value, which is determined by an expert valuation report.
Land cannot be depreciated, as it does not wear out.
In most cases, an expert valuation report is required to apply depreciation. Depreciation based on the purchase price can only be used for properties acquired within five years before the start of rental. However, purchase contracts usually do not distinguish between the value of the building (apartment, house, hall, etc.) and the value of the related land (built-up area, garden, or other plots). Therefore, an expert valuation report is necessary in this case as well.
Practical Example – How to Depreciate a Rental Apartment
Mr. Šmíd owns an apartment in Prague–Strašnice. The apartment (2-room layout) is valued at CZK 6,000,000.
He receives CZK 25,000 per month in rental income. If he did not claim any expenses, he would pay CZK 3,750 per month in income tax. By applying depreciation, he pays only CZK 1,200 per month — saving CZK 14,400 per year.
Other deductible expenses
In addition to depreciation, other expenses that can reduce the rental income tax base include:
– mortgage interest,
– costs of interior furnishings,
– repair and maintenance expenses,
– property insurance,
– and technical improvements.
Technical improvements may include, for example, insulating the building, provided the investment exceeds CZK 40,000.