In this article, we highlight an important judgment of the Regional Court in Ostrava (Case No. 25 Af 16/2025-43) addressing the application of the holding period test for personal income tax exemption on the sale of a fractional real estate share when individual shares were acquired sequentially over time.
The key legal question was whether compliance with the holding period test must be assessed separately for each incrementally acquired fractional share, or whether the entire property share should be treated as a single indivisible unit with sales proceeds allocated proportionally based on acquisition dates—the current approach enforced by the Czech tax administration.
Factual Background of the Dispute
The case dates back to 2006, when the claimant acquired a 1/2 fractional share in several parcels of land under a purchase agreement. Ten years later, in 2016, he purchased the remaining 1/2 share, becoming the sole owner of the entire real estate.
A critical moment occurred in 2020, when the owner decided to sell a 1/3 fractional share of the property for nearly CZK 31.8 million. The claimant treated this income as fully exempt from personal income tax, as the volume of the 1/3 share sold fit entirely within the scope of the original 1/2 share acquired in 2006, which safely satisfied the holding period test (which at the time was five years).
The Tax Authority’s Position
The dispute arose due to a conflicting legal interpretation by the tax authorities, who strictly applied a blanket proportional reduction methodology:
- First-Instance Tax Office Audit: The tax office concluded that because 50% of the property met the holding period condition and 50% did not, the income from selling the 1/3 share was exempt only up to 50%. Consequently, it issued an additional tax assessment along with late-payment penalties.
- Appellate Tax Directorate (OFŘ): The taxpayer appealed, but the Appellate Tax Directorate rejected his arguments. Furthermore, the appellate authority adopted an even stricter position to the taxpayer's detriment, reducing related acquisition costs and loan interest tax deductions to a mere 1/6, arguing that after the sole ownership consolidated in 2016, it was no longer possible to identify which specific historical share was being sold.
Findings of the Regional Court in Ostrava
The taxpayer challenged the decision by filing an administrative lawsuit with the Regional Court in Ostrava. The claimant argued that an undivided fractional share in real estate constitutes a distinct legal object, and the subsequent acquisition of the remaining portion cannot retroactively penalize the owner or strip away tax exemptions on previously acquired property.
The tax authority maintained its formal position based on GFŘ Instruction D-22 (currently retained in GFŘ Instruction D-59), asserting that for sequentially acquired assets, exemptions and deductible expenses must be applied strictly in proportion to the historical shares satisfying the conditions.
The Regional Court ruled in favor of the taxpayer, holding that the holding period test must be evaluated separately for each sequentially acquired share, relying on logic corresponding to the FIFO (First-In, First-Out) principle.
Key Holding of the Judgment
Where a taxpayer subsequently sells a fractional share that is smaller than or equal to the volume of ownership for which the holding period test has already been satisfied, the income derived from that sale is exempt from tax in its entirety.
Beyond its conclusions on tax exemption, the Court added that even if a portion of the income were non-exempt, associated tax-deductible expenses would have to be assessed in direct connection with the specific historical share acquired. Tax-deductible expenses would therefore not consist of a proportional average purchase price across all acquired shares, but rather the specific acquisition cost of the share whose sale was subject to taxation. The Court applied the exact same rationale to loan interest used to finance the acquisition.
Core Arguments Supporting the FIFO Method for Fractional Real Estate Shares
This judgment represents a major contribution to interpreting holding period rules for sequentially acquired real estate and carries significant practical implications for similar tax disputes. Based on this ruling and existing jurisprudence, several key arguments support applying the FIFO method when selling fractional real estate shares:
- Distinct Legal Status: An undivided fractional share in real property has the legal character of a distinct item/asset, which must undergo the holding period test independently for each acquired share.[1]
- Duty of Investigation: When assessing compliance with the holding period test, the tax administrator is obliged to examine when the taxpayer acquired the specific volume of ownership rights corresponding to the transferred share.
- Symmetrical Expense Allocation: The FIFO principle applies equally to the cost side of the transaction. If a sale is non-exempt, deductible expenses must reflect costs demonstrably linked to that specific historical share, rather than an averaged valuation.
- Distinction from Corporate Shares: Proportional allocation is widely used when selling business shares / equity stakes (obchodní podíly), where it is well-justified because incremental equity top-ups in the same legal entity cannot conceptually create separate new corporate stakes. Past case law has highlighted the distinct legal nature and acquisition methods of these two asset classes.[2] Applying two distinct methods—FIFO for real estate and proportional allocation for corporate shares—is not a regulatory conflict; rather, this distinction reflects asset characteristics, opening the door for fairer income/expense allocation methods and supporting a reform of established administrative interpretation.
[1] See, for example, Supreme Court Judgment Case No. 26 Cdo 2864/2000 or Supreme Administrative Court Judgment Case No. 7 Afs 7/2015-47; the independent legal status of a fractional share is also affirmed in Supreme Court Judgment Case No. 22 Cdo 730/2021.
[2] See Supreme Administrative Court Judgment Case No. 5 Afs 91/2004-47.
This text was translated by AI.
