Application of time test to proceeds from sale of former cooperative apartment

If you intend to sell an apartment that had been in cooperative ownership (owned by a housing cooperative in which you were a member) before you became its owner, beware of calculating the time test: the period of time of the membership in the housing cooperative cannot be included in the time test for tax exemption of the proceeds from the sale.

The Supreme Administrative Court (SAC) dealt with the taxation of proceeds from the sale of an originally cooperative apartment, which took place in 2014 (2 Afs 211/2020-29). The key legal question was whether the five-year time test for the tax exemption of the proceeds from the sale of an apartment should also include the time for which the seller had held a share in the respective housing cooperative.

The complainant had held a member’s share in a housing cooperative since 2004, and the right to use the apartment since 2005. In 2013, she acquired, free of charge, the ownership right to the apartment, which she subsequently sold in 2014. She considered the proceeds from the sale of the apartment to be exempt from tax on the grounds of meeting the “time test” of five years between the acquisition of the apartment and its sale. She based her entitlement to the exemption on the linguistic interpretation of the term “acquisition”, and on the SAC’s case law (2 Afs 20/2011-77 of 15 April 2011): in the previous judgment, the SAC held that the term “acquisition” in Section 4(1)(b) of the Income Tax Act can be interpreted to include the acquisition of member’s rights to an apartment in cooperative ownership.

The SAC concluded that the complainant did not meet the conditions for the tax exemption, as the sale of the apartment took place in 2014 when the new wording of the mentioned provision was already in force: effective from 1 January 2014, the vague term ‘acquisition’ was replaced by ‘acquisition of an ownership right’. According to the SAC, this eliminated the legislative inaccuracy, overriding the previous case-law to which the complainant had referred and from which she derived her entitlement to the tax exemption of the proceeds from the sale of the apartment.

Therefore, when an apartment that had been previously in a cooperative ownership is being sold, the period of time for which the person owned a member’s share in the housing cooperative can no longer be included in the time test. This may have a significant effect on whether the proceeds from a sale of a formerly cooperative apartment will be exempt from tax, which is currently particularly relevant, as the time test has been extended from 5 years to 10 years if the seller has not had their residence in the apartment prior to the sale.

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