Legal Services for Real Estate Investors in the Czech Republic

Why investors need specialised legal services

Most often, we encounter situations where an investor entered into a transaction without sufficient legal preparation, signed documents without attorney review, and later discovered that the property had hidden defects. It is also common for a tenant to stop paying, leaving the investor in a legally difficult position to unwind. All of this could have been prevented with appropriate legal advice.

Tax aspects of real estate investing in the Czech Republic

Tax optimisation is one of the most important parts of a successful investment strategy and also an area where an investor can save—or, conversely, unnecessarily lose—significant amounts. The choice between investing as an individual and through a limited liability company (s.r.o.), the correct application of depreciation, and proper reporting of income and expenses—all of this has a fundamental impact on your profit and tax burden under Czech legislation.

Acquisition structure: individual versus s.r.o.

This decision has long-term financial consequences. Individuals can use the so-called time test for income tax exemption—if they own the property (which is not included in business assets) for at least 10 years, the subsequent sale is fully exempt from tax under Act No. 586/1992 Coll., on Income Taxes. Limited liability companies do not have this exemption and always tax the profit from a sale.

It is also important to understand how depreciation works. An individual may claim depreciation if they do not apply lump-sum expenses, but instead keep tax records or accounting. However, if you choose a structure through an s.r.o., keeping accounting records is mandatory and depreciation is a standard tool for reducing the tax base. For example, for an s.r.o. with rental income of CZK 120,000 per year and depreciation of CZK 100,000, the tax base would be reduced to CZK 20,000.

Depreciation and its tax effectiveness

Whether you own the property through an s.r.o. or as an individual applying actual expenses, you have the option to apply so-called straight-line or accelerated depreciation. Depreciation works by deducting a certain portion of the acquisition cost from the tax base each year until the property is fully depreciated. This allows you to reduce the tax burden in each tax period.

However, Czech tax legislation contains many details and exceptions. For example, the Income Taxes Act includes detailed rules on which immovable assets can be depreciated, how the acquisition cost is determined, and when depreciation can be interrupted. The attorneys at ARROWS, a Prague-based law firm, in cooperation with tax advisors, routinely handle such structuring for clients and know how to optimise the tax regime to fit your specific situation. Write to us at consultation@arws.cz.

Mortgage interest: the difference between owner-occupied housing and an investment

This is where investors often make mistakes. If you are an individual and have a mortgage for your own housing needs, you can deduct interest from the tax base. However, for an investment property (rental), this deduction cannot be applied under Section 15 of the Income Taxes Act.

For an investment property, however, mortgage interest is a tax-deductible expense (cost) under Section 9, if you apply actual expenses. In that case, you can reduce rental income by the interest paid in full. ARROWS, a Prague-based law firm, will ensure you claim these expenses correctly under Czech tax rules.

Legal risks hidden in real estate

When deciding to purchase an investment property, it is very easy to focus primarily on the price, the level of potential rent, and the location. The reality, however, is more complex. Cadastral maps, title deeds, construction documentation, legal defects, and limitations of ownership rights often conceal risks that can increase enormously during the period of ownership. The attorneys at ARROWS, a Prague-based law firm, deal with precisely these types of cases every day and know which details to watch for under Czech law. Email us at consultation@arws.cz. 

Legal due diligence of real estate

Legal due diligence (so-called “due diligence”) is a systematic legal audit of a property aimed at uncovering hidden risks, legal defects, and potential future disputes in the Czech Republic. It is not merely a review of the Czech Real Estate Cadastre. The review includes verification of acquisition titles, checking the history of transfers, identifying mortgages and enforcement proceedings, analysing zoning and planning documents, and reviewing all relevant contracts.

The Czech Real Estate Cadastre may tell you who is registered as the owner, but it will not protect you from a situation where the access road belongs to someone else. In practice, we also often encounter “black buildings” (unauthorised structures)—illegally added balconies, garages, or pergolas. Legalising such structures under the new Czech Building Act can be complex and costly; in extreme cases, an order to remove the structure may even be issued.

Easements and access rights

An easement (servitude) restricts the property owner for the benefit of someone else. For example, a neighbour’s right to pass across your land or the right to run utility networks. If an easement is not properly registered in the Czech Real Estate Cadastre but exists (e.g., by prescription or by operation of law), you may later face unexpected complications.

When purchasing real estate, it is essential to verify:

• Whether access to the property is legally secured.
• Whether the property is encumbered by third-party rights (e.g., lifetime use).
• Whether there are tenancy relationships attached to the property that transfer to the new owner under Czech law.

The attorneys at ARROWS, a Prague-based law firm, can help you prepare detailed legal due diligence and structure the purchase agreement so that it protects you. Email us at consultation@arws.cz. 

Construction documentation and use of the building

A building may be used only for the purpose defined in the occupancy permit decision (or consent). If you purchase a property that has been altered without a permit or is used contrary to the occupancy approval (e.g., residential living in non-residential premises), you expose yourself to the risk of a fine from the Czech Building Authority and a prohibition on use.

We also encounter properties that are not compliant with the zoning plan. The zoning plan determines what may be built on a given plot in the Czech Republic. If you buy land intending to build, but the zoning plan does not allow it or plans a motorway nearby, the investment may be devalued. In practice, these issues often surface only when the investor wants to renovate or sell the property.

Real estate financing and legal aspects of a mortgage

A mortgage is not only a financial product but also a binding legal relationship that limits your ownership rights under Czech law. The mortgage agreement grants the bank strong powers, including the ability to sell your property if you stop making repayments.

Mortgage financing terms for investors

The rules for providing mortgages are regulated by the Czech National Bank (ČNB) through indicators such as LTV (loan-to-value) and DTI (debt-to-income). For investment properties, banks often apply stricter rules than for owner-occupied housing. Typically, a higher share of own funds is required, and the bank assesses whether future rent will cover the loan instalment.

If the rent does not cover the instalment and you must subsidise the loan from other income, the bank will take this into account when assessing your creditworthiness. The legal documentation for a loan for an investment property may also include specific covenants (conditions), such as an obligation to maintain a certain occupancy rate or a prohibition on further indebtedness.

Legal framework of a mortgage and pledge (mortgage) rights

To secure the loan, the bank establishes a pledge (mortgage) right over the property, which is registered in the Czech Real Estate Cadastre. This means that the property cannot be sold (transferred to another person) or further encumbered without the bank’s consent. A prohibition on disposal and encumbrance is also often established as an in rem right.

If you fall into arrears with repayments, the bank may, after accelerating the loan, propose the sale of the property (by auction or by a private sale). In the event of enforcement proceedings in the Czech Republic, the bank, as a secured creditor, has priority to be satisfied from the proceeds of the sale.

Property insurance as part of a mortgage

Banks require the assignment of insurance proceeds in their favour. This means that in the event of an insured event (fire, flood), the insurer will pay the money primarily to the bank to cover the debt, not to you.

A key risk is underinsurance. If the property is insured for CZK 2 million (e.g., the amount of the mortgage), but its reinstatement value is CZK 4 million, in the event of a total loss the insurer may reduce the payout proportionally due to underinsurance. Contracts should include indexation of the insured sum to reflect rising construction labour and material costs.

Property management and lease relationships

Securing stable returns requires flawless lease agreements. ARROWS’ Czech legal team deals with disputes every day that could have been avoided with high-quality documentation.

Lease agreement – the key legal document

A high-quality lease agreement must include not only the basic essentials (who, what, for how much), but also solutions for crisis situations. It must clearly define:

• The amount of the security deposit.
• Allocation of service charges and how they are settled.
• Maintenance obligations – what the tenant pays (minor repairs) and what the landlord pays.

Many downloadable template agreements are outdated or invalid under Czech law. For example, it is not possible to validly agree a contractual penalty in an unreasonable amount or to prohibit a tenant from keeping a pet (if it does not cause disproportionate inconvenience).

Landlord protection and dealing with non-paying tenants

Non-payment of rent is an investor’s nightmare. Under the Czech Civil Code, you may terminate the lease for a gross breach of obligations. If the tenant fails to pay for 3 months, you may terminate without a notice period. Even so, you must first call on the tenant to remedy the breach.

If the tenant does not move out voluntarily, you must not evict them by force or change the locks (you risk criminal prosecution for unlawful interference with the inviolability of the home). You must file an action for eviction with the court. This process can take months or years in Czech courts, which is why prevention and tenant screening are crucial.

Claims for defects

The tenant is entitled to a rent reduction if defects of the property prevent proper use (e.g., non-functioning heating in winter, noise from reconstruction works in the building). The landlord must remedy defects without undue delay. Disputes can be prevented by a handover protocol with photo documentation at the start of the tenancy, capturing the condition of the apartment.

Property insurance

Insurance protects not only the value of the asset, but also you against liability for damage.

Types of insurance

• Building insurance : Covers the structure (walls, roof) against natural disasters.
• Household contents insurance : Covers equipment (furniture, appliances). In a rented apartment, the tenant should ideally arrange it for their own property.
• Property owner’s liability insurance : Essential for an investor.

Risk of underinsurance

As mentioned, underinsurance is both a legal and financial trap. If the value of the property has increased (inflation, renovation) but the policy has remained unchanged, the insurer will reduce the payout. We recommend policies with automatic indexation or regular policy reviews (at least once every 2 years).

Real estate portfolio management

As your portfolio grows, administrative and legal demands increase as well.

Tenant management and screening

Selecting the tenant is very important. Under GDPR, you have a legitimate interest in requesting information necessary to conclude the agreement.

• Insolvency Register and the Central Register of Enforcement Proceedings (Centrální evidence exekucí) : Publicly available registers in the Czech Republic.
• Proof of income : You may request it.
• References : Calling previous landlords is common practice.

ARROWS advokátní kancelář can help you set up a tenant due diligence (screening) process in compliance with personal data protection requirements.

Investor relations management – building a network

ARROWS, a Prague-based law firm, has long cooperated with investors and property managers in the Czech Republic. We provide comprehensive legal support for family offices, real estate funds, and individual investors. We handle acquisitions of entire portfolios, transfers of ownership interests in real estate SPVs (s.r.o.), and development projects.

Conclusion

Real estate investing is a marathon, not a sprint. Successful investors are those who have risks properly managed, taxes correctly structured under Czech legislation, and watertight contracts. The attorneys at ARROWS, a Prague-based law firm, deal with these matters every day and know how to help you optimise your investment strategy and protect your assets in the Czech Republic.

Without high-quality legal advice, you expose yourself to the risk of additional tax assessments, protracted disputes with non-paying tenants, or purchasing a property with a legal defect. ARROWS advokátní kancelář, insured for professional liability for hundreds of millions of Czech crowns, will provide the certainty you need for your investments.

Contact ARROWS advokátní kancelář at consultation@arws.cz to arrange a consultation. Briefly describe your situation and we will get back to you with a proposed solution.

Read also:

• Cross-Border Construction Law and Building Due Diligence in the Czech Republic: What Foreign Investors Should Know
• Who Can Be a Party to Czech Building Permit Proceedings?
• Setting Up a Czech Subsidiary: Key Legal and Tax Considerations
• Tax Implications of Closing a Company in the Czech Republic
• Mergers and Acquisitions in the Czech Republic: Legal Steps for Foreign Investors