By Piotr Paśko and Rafał Kran, tax advisers and partners in the Real Estate Team at MDDP


A lack of investment plots in prime locations means that developers are increasingly interested in purchasing developed properties such as old office buildings, commercial or industrial facilities either to demolish or modernise it. Such redevelopment has recently become a trend, especially among residential developers, as demand for housing is high. Our article is intended to draw attention to selected tax aspects of redevelopment.

Projects for rent or sale

The tax consequences depend on the purpose of the investment. Rental facilities are accounted for as fixed assets. In turn, investments for sale (especially residential premises) are accounted for as goods for sale. Polish tax law does not provide for specific provisions for the real-estate industry in this respect. Therefore, general regulations apply, which means that the practice of tax authorities (expressed, among others, in tax rulings) and court judgments are of great importance. Development investments involve significant capital, which also translates into high sensitivity to risk. As a result, developers often want to confirm the settlement method through tax rulings, especially in areas that have not yet been sufficiently worked out in practice. This also applies to redevelopment aspects.

Acquisition of real estate and market values

Well, it all depends on the agreement (maybe not all – but pretty much). Proper purchase price split (meaning the appropriate allocation of transactional values between a land and the building), may have measurable business and tax consequences. Unfortunately, the parties do not have total transactional freedom here. Based on the tax regulations, any prices (also applied between non-related parties!) should be within market ranges. In practice however, there are situations when the parties to the transaction do not pay (that much) attention to the purchase price split. A market price should take into account various factors related not only to the transaction, but also to the buyer’s intention related to the use of the land and building. Land as fixed asset is not subject to tax depreciation. It can be settled as an expense only at the time of sale. In turn, in residential projects for sale, land is treated as an element of the sold goods, and therefore its value is the cost of the premises sold. Buildings used in business activities are fixed assets subject to depreciation. But a building purchased with the intention of demolishing it should not be classified as a fixed asset. Its value may constitute capex of a new project. Depending on the technical condition of the asset, it can sometimes be assessed that such an object has no market value. If the building is not intended for demolition, but for modernisation/reconstruction, it may be treated as a fixed asset from the beginning and new expenditure should be settled according to the principles applicable to improvements. In residential projects, the value of such a building is treated similarly to land – that is, as elements of goods for sale. Nevertheless, effectively it is the capex of the investment.

Renovation or improvement

The technical scope of redevelopment works may have various tax consequences. In particular, the division into improvement and renovation expenses is crucial. All types of improvements constitute Capex, while renovation is an opex expenditure (settled directly in the tax result). It cannot be ruled out that some of the works would be of this nature. A lot depends on technical descriptions. Sometimes they are imprecise and may lead to unexpected tax consequences foiling the investor’s plans. This is especially important in commercial projects aimed at creating a fixed asset.

Acquisition of commercialised buildings

A more complicated situation concerns the purchase of commercialised buildings, in which the new buyer must wait for the expiry of the lease agreements to take steps towards redevelopment. Buyers are obliged to recognise a fixed asset for tax purposes if the expected period of use of the purchased building exceeds one year (for example due to ‘taken over’ leases lasting another 13 months). The value of such an object is settled in the tax result through depreciation write-offs, and from the moment of demolition by writing off the undepreciated initial value. Such cases of demolition of an “old” building in connection with plans to build a new one are treated under CIT as liquidation of a fixed asset. According to the practice of the tax authorities, such a deduction constitutes a one-off tax expense, which may be problematic, assuming for example that the first sales revenues will be obtained in more than five years (for residential projects).

Taking into account the economic situation and legal conditions of the real estate market, the biggest problem here is the rules for recognising tax losses. The taxpayer may claim for the loss incurred in a given year:

  • Reduce the income obtained from the same source in the next five tax years, provided that the amount of the reduction in any of these years cannot exceed 50% of the amount of this loss, or
  • reduce once the income obtained from the same source in one of the next five tax years by an amount not exceeding five million złotys (the undeducted amount is subject to settlement in the remaining years of this five-year period, however, the amount of the reduction in any of these years cannot exceed 50% of the amount of this loss).

In practice, a loss resulting from the demolition of a building that is a fixed asset may never be used by the developer. Such a conclusion may raise considerable doubts from the perspective of expediency – it can be argued that due to the specificity of this type of entities (i.e. usually special-purpose vehicles established exclusively for the implementation of one specific project), all their costs are aimed at generating income from rental or as a result of the sale of premises.

ESG taxonomy

Rearrangement of old buildings or demolition of old ones may involve various ESG aspects. Such investment plans may be consistent with the assumptions of the Green Deal, e.g. in relation to ESG reporting obligations and ESG taxonomy. Even if the investor is not directly covered by such obligations (at least – as for now), it cannot be ruled out that banks financing the investment will require appropriate ESG activities or offer more favourable loans for investments that meet specific ESG requirements. When planning a new investment, it is worth taking into account the ESG context, technical taxonomy criteria and tax consequences from the very beginning. It is possible that the implemented investment scenario will be the result of these various aspects.


When making a decision to purchase a developed property, the legal, tax and technical environment of such a property should be fully analysed in the context of the business purpose. It may turn out that certain issues will raise tax risks, and that transaction arrangements will be crucial, including the provisions of the sale agreement (both asset deal and share deal). The tax and accounting qualification of the building plays a key role. Incorrect recognition of a building as a fixed asset may have serious consequences for investment settlements. And in the context of possible partial demolitions and modernisation of the space, the appropriate coordination of technical and tax and accounting aspects is of great importance. In an increasingly difficult real estate market, those who understand the above issue will simply have a better chance of success.