Income derived from the sale of immovable property such as land or buildings becomes liable for personal income tax when the ownership in the property is transferred.
Personal income tax should be paid by withholding tax, which is calculated at a progressive rate (5-35%) based on the gain arising from such a sale. A special rule in the Thai Revenue Code (TRC) states that the sale price of an immovable property sold by the individual shall be based on the appraised value used for collection of registration and transfer fees under the land code (appraisal value) regardless of the actual price or the market price (refer to Section 49 bis of the TRC).
The gain from which the withholding tax is computed equals the appraised value of the property less the standard deduction, which varies according to the number of years that the property is held by the seller, as prescribed by a royal decree (see Appendix).
But if the sale is of property acquired as an inheritance or gift, the standard deduction is fixed at 50% regardless of the number of years the property is held. The term “number of years the property is held” means the number of years from the year of the acquisition of ownership in an immovable property to the year of the transfer of such ownership. A period exceeding 10 years shall be treated as 10 years only, and a fraction of a year shall be counted as one year.
Provided you are not a real estate developer or a professional real estate trader, this withholding tax will be your final tax if you elect to exclude income derived from the sale of immovable property from other taxable income in the computation of your annual personal income tax payable and you do not claim the tax so withheld. In the event you elect to treat withholding tax as the final tax, the total tax payable on such a sale of immovable property shall not exceed 20% of the sale price.
If you elect to include income from the sale of immovable property in your annual personal income tax return, you may choose between itemising expenses related to the sale of such immovable property or taking the standard deduction as referred to in the Appendix.
Net income from the sale of immovable property after either itemised deduction or standard deduction shall then be included with your net taxable income from other sources. As such, your net income from the sale of an immovable property shall be taxed at your marginal tax rate and you may find yourself paying more tax in comparison with the withholding tax method.
For example, if your net taxable income excluding income from the sale of an immovable property already reaches 4 million baht, your net income from the sale of immovable property shall then be taxed at 35% while your effective tax rate (total tax divided by net income from the sale of immovable property) for withholding tax purposes may be less than 35%, as tax for withholding tax purposes is computed starting at 5%.
You may argue that if you choose to itemise the expenses, which include the cost of land and building, it may be larger than the standard deduction, so your tax payable on income from the sale of an immovable property may be lower than the withholding tax. This is possible, but if you choose to itemise, the rules and conditions for the computation of net taxable profits for corporate income tax purposes shall apply in determining the deductible expenses.
That is, you must be able to provide supporting evidence that shows the itemised deductions are in accordance with the conditions for the computation of net taxable profits under Section 65 bis of the TRC and that the expenses are not disallowed items under Section 65 ter of the TRC. You may deduct the cost to acquire the land or building in computing the net taxable income but only the net value after depreciation expenses.
Under Section 65 bis and ter of the TRC, land cannot be depreciated, whereas the building is depreciated over 20 years. As such, the full cost of land as so acquired should be a deductible expense, whereas the cost of a building should be the net of the depreciation expenses. You should then compare whether the cost of land and building — net of depreciation expenses including other deductible expenses related to the sale — is larger than the deduction rate as prescribed by the royal decree in the Appendix.
In addition, if you choose to itemise to reduce your net taxable income, you should also consider whether you end up paying more tax due to the high marginal tax rate.
In the event of the purchase of a new property to replace an old property, with your name in the house registration for not less than one year, income from the sale of the old property shall be exempted from income tax. The exempted income shall not exceed the value of new property, which shall also be determined based on the appraisal value.
It is important that your name appear in the house registration of the old property for a period or periods of at least one year before you enter into the new property’s purchase agreement.
But if your name appears in the old property’s house registration for less than one year because you bought the new property before you sold the old property, you are still eligible for the tax exemption if the total period during which your name appeared in the house registration of both the old and the new properties is more than one year when you finally sell the old property.
The property in this case may include a house, building or condominium for residence purposes only and also include the land attached to said house or building. The exemption still applies if you use the property as a place for your own business as long as you reside at the property.
If you are deducted tax when you transfer ownership of the old property, you are eligible for a tax refund by submitting an application for tax refund (form Kor. 10) together with supporting documents — i.e., the tax receipt issued by the land office, copies of the purchase agreement of both the old and the new properties and a copy of the house registration for both properties showing an ownership period of not less than one year. More details of the conditions for the exemption and tax refund can be found in Notification of the Director-General No.125.
Benjamas Kullakattimas is a partner at KPMG Thailand.