Rental income

Are you an investor, or an entrepreneur? The decisive line between Section 7 and Section 9 of the Income Tax Act (ITA)

Income for individuals from the regular rental of real estate, such as long-term rentals of an apartment, house, or land not conducted as a business activity, is governed by the provisions of Section 9 of the ITA. This typically applies when an investor does not provide additional services associated with short-term accommodation.

However, if the property is included in the business assets of a company or an individual, or if it involves short-term rentals (e.g., via Airbnb) combined with supplementary services (cleaning, bed linen), it is considered income from independent activities under Section 7 of the ITA.

Correct classification is critical. While income under Section 9 allows for claiming 30% lump-sum expenses, rental income falling under Section 7 permits a 60% lump-sum deduction (with a stricter limit). Moreover, income under Section 7 may create an obligation to pay social security and health insurance contributions, which is excluded for Section 9.

Joint property of spouses and tax liability

If a property falls under the joint property of spouses, the resulting rental income is taxed by only one of them. Crucially, all rent from the property must be declared in the tax return of only the chosen spouse; it is not possible to split the income in half.

Although the law does not permit income splitting, strategically assigning the entire income to the spouse with lower overall taxable income or greater potential to claim tax deductions represents a significant tool for optimizing the family's overall tax burden. This requires a careful legal assessment of both spouses' situations. 

The ARROWS law firm can assist you with a legal analysis and assessment of the correct classification of your income to prevent future additional tax assessments. For an immediate solution to your situation, write to us at konzultace@arws.cz. 

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The Tax Optimization Dilemma: Lump-Sum vs. Actual Expenses

The choice between claiming lump-sum and actual expenses is the most fundamental decision in tax optimization for rental income. For corporate investors and owners of larger properties, this choice is pivotal.

Comparison of Options and Limits

For income under Section 9 of the ITA, the simplest method appears to be claiming lump-sum expenses at 30% of income. However, this option has a firm limit: the maximum amount of lump-sum expenses is CZK 600,000. This means the limit is reached with an annual income of CZK 2,000,000.

While using the lump-sum method only requires keeping records of income and receivables, the investor forgoes the option to include payments to the repair fund and lump-sum transportation expenses in their costs.

Claiming actual expenses is recommended for all taxpayers whose actual expenses exceed 30% of their total rental income.

Why Corporations and Investors Choose Actual Expenses

For sophisticated investors who use external financing, the path of actual expenses is more effective and legally maximizes deductions. Recognizable actual expenses include interest on a mortgage loan (or building society loan), repair and maintenance costs, property insurance, real estate tax, and the key element of property tax depreciation.

For investors who finance their purchases with loans and also claim tax depreciation, the lump-sum method is almost always disadvantageous. This is because the sum of interest and depreciation is guaranteed to exceed the 30% cap, which would represent an untapped tax optimization opportunity if the lump-sum deduction were used. Claiming actual expenses is therefore a more sophisticated and precise way to reduce the tax base. 

Our tax specialists and lawyers will ensure the preparation of internal guidelines and proper maintenance of tax records, so that your actual expenses are 100% deductible. Our lawyers are ready to help you – write to konzultace@arws.cz. 

Yes, tax deductions such as donations, mortgage interest, or life insurance contributions can also be claimed with rental income. Do not hesitate to contact our office – konzultace@arws.cz. 

Mastering Tax Depreciation: Optimizing Investment Value

For long-term investors, tax depreciation is arguably the most powerful tax-deductible expense. Depreciation does not reduce real cash flow, but it significantly reduces the tax base throughout the property's lifespan.

The Strategic Role of Depreciation

The cornerstone of tax optimization is the correct classification of real estate into the appropriate Depreciation Group. This classification is governed by Annex No. 1 of the ITA and is done in the first year of depreciation according to the primary use of the building.

The minimum depreciation period is strictly defined by law. For example, properties in the 4th depreciation group have a minimum depreciation period of 20 years, while residential buildings and commercial properties are usually placed in the 5th depreciation group with a minimum depreciation period of 30 years. The most complex buildings fall into the 6th depreciation group with a depreciation period of 50 years.

Choice of Method: Straight-Line vs. Accelerated Depreciation

The taxpayer can choose between two main methods of tax depreciation: straight-line and accelerated.

Straight-line depreciation provides stable and predictable annual deductions, which is often preferred for long-term and conservative corporate strategies. In contrast, accelerated depreciation allows for higher deductions in the early years of asset ownership. This is advantageous if the goal is to quickly reduce a high tax base at the beginning of an investment and improve cash flow.

The strategic choice between straight-line and accelerated depreciation is made only once—in the first year of depreciation. An incorrect choice at this point can have irreversible consequences for tax optimization over a period of 20 to 50 years. Therefore, Chief Financial Officers (CFOs) and investors must pay maximum attention to this decision and secure a legal audit before starting depreciation. 

Our experience in providing long-term services to our clients allows us to design a depreciation strategy tailored precisely to your investment plan, as our portfolio includes more than 150 joint-stock companies and 250 s.r.o.s. Need legal certainty? Contact us at konzultace@arws.cz. 

Technical Improvement: A Lever for Increasing Tax-Deductible Costs

Understanding the difference between an immediate tax expense (repair) and a depreciable investment (Technical Improvement) is key to long-term property management.

The Difference Between a Repair and a Technical Improvement

For the purposes of the ITA, a technical improvement (hereinafter also "TI") refers mainly to expenditures on completed extensions, additions, structural modifications, reconstructions, and modernizations. Importantly, an expenditure is considered a technical improvement if it exceeds a set limit (currently CZK 80,000) in a given tax period.

Distinguishing whether an expense is a repair (which is an immediate tax-deductible expense that reduces the tax base) or a technical improvement (which must be depreciated over decades) is one of the most common points of contention during tax audits. Misclassification leads to an unjustified reduction of the tax base and a subsequent additional tax assessment.

Technical Improvement Carried Out by a Tenant

In a B2B environment, especially when leasing commercial spaces, it is common for the tenant to make changes to the leased property and finance them. If the tenant has the landlord's consent, they can depreciate the TI as their own tax expense.

Problems arise upon termination of the lease. The tenant can claim the residual value of the TI as an expense, but only up to the amount of compensation received from the landlord. The compensation received is simultaneously taxable income for the tenant. The landlord then recognizes taxable income equal to the difference in the residual value of the TI. 

Without a proper lease agreement, approval protocols, and documentation (e.g., photographic evidence), the TI cannot be properly depreciated by the tenant, causing tax problems for both parties. 

Our lawyers specialize in drafting and reviewing contracts that will provide you with tax certainty regarding Technical Improvements. Do not hesitate to contact our office – konzultace@arws.cz.

Cross-Border Income: Taxation of Rental Income from Abroad

Investors who diversify their real estate portfolios abroad must navigate complex international tax law, which requires expert knowledge of Double Taxation Treaties.Taxation Rules Outside the Czech Republic

The basis for taxing foreign income is bilateral Double Taxation Treaties (DTTs). These treaties determine which method of eliminating double taxation will be used: the Exemption Method or the Simple Tax Credit Method.

The most commonly used is the Exemption Method (with progression). This means that although income from abroad is not included in the tax base in the Czech Republic (it is exempt from tax), it affects the tax rate applied to other Czech income (due to progression).

An error in applying a DTT (e.g., incorrect choice of method or misinterpretation of the foreign tax base) leads to inefficient double taxation, where the taxpayer pays tax in both the source country and the Czech Republic without the possibility of full compensation.

Comprehensive International Solutions with ARROWS International

The ARROWS law firm provides legal services in the field of international taxation and real estate. Thanks to the ARROWS International network, built over ten years, we handle issues with an international element on a daily basis. Our expert knowledge of foreign tax systems, which often have different rules for depreciation and expense deductibility than the Czech ITA, is essential for the correct application of the credit or exemption method.

By serving as a legal bridge between jurisdictions, ARROWS ensures that the foreign tax base is correctly credited or exempted, thereby effectively avoiding double taxation. Do you want to be sure that your foreign rental income is optimized according to the applicable DTTs? 

Our lawyers will provide legal advice on international taxation – contact us at konzultace@arws.cz and get a tailored legal solution.

Risk Prevention: Avoid Fines and Audits from the Tax Authority

Tax optimization brings savings only when it complies with the law. Any error in a tax return or accounting records can result in high penalties.

The Price of an Error: Interest and Penalties

Errors in a tax return, whether incorrect depreciation or misclassification of a Technical Improvement, have real financial consequences. The Tax Authority is obliged to charge late payment interest and potential fines.

Late payment interest for the delayed payment of an additional tax assessment is high in the Czech Republic. It is derived from the current repo rate of the Czech National Bank plus 8 percentage points. For example, as of July 1, 2025, with a repo rate of 3.50% p.a., the late payment interest would be 11.50% per year. This interest accrues daily, quickly increasing the total debt.

For corporate clients, penalties under the Act on Accounting are also a threat. An accounting entity that is an entrepreneur (SME or corporation) can be fined up to 6% of its total assets for serious offenses (e.g., failing to keep accounts in accordance with the law or failing to prepare financial statements).

Such a high price for an error creates a strong imperative to invest in preventive legal compliance. A legal audit by ARROWS can identify hidden risks (e.g., in the incorrect classification of income or depreciation) and prevent additional assessments that would lead to a chain reaction of interest and penalties.

Readiness for an Audit and the Procedure for Resolving Doubts

If the Tax Authority initiates an audit procedure (e.g., a procedure to resolve doubts), the deadline for refunding any tax overpayments is also extended. Overpayments are typically processed only after the statutory deadline for filing the return has passed, and any doubts on the part of the Tax Authority further delay this date.

Robust legal and tax documentation is therefore a key safeguard that ensures audits proceed smoothly and without delay. The lawyers at ARROWS will prepare comprehensive documentation for you that protects against fines and penalties and ensures trouble-free audits. For an immediate solution to your situation, write to us at konzultace@arws.cz. 

Conclusion: Expertise, Speed, and Certainty for Your Real Estate Investments

Successful tax optimization of rental income lies in expertly navigating between Section 7 and Section 9 of the ITA, precisely determining actual costs (including tax depreciation), and strictly adhering to the rules for Technical Improvements. Only then can the risk of high late payment interest and crippling fines be minimized.

Furthermore, we can connect clients with each other if they have interesting investment or business opportunities. And we are also happy to listen to interesting entrepreneurial or business ideas.

Whether you are dealing with setting up a depreciation strategy, reviewing lease agreements, or the international taxation of real estate, the lawyers at ARROWS will provide you with suitable legal services, which include:

• Drafting internal guidelines (for the correct distinction between repairs vs. Technical Improvements).

• Legal consultations that protect against fines and audits.

• Drafting or reviewing contracts, including those for international leases.

• Representation before courts and administrative authorities in tax disputes.

• Expert training for employees or management, including certification.

Don't wait for the Tax Authority to ask for an explanation. Contact us today to ensure that your real estate investments generate maximum legal profit. Need legal certainty? Contact us at konzultace@arws.cz.