Purchase of land including the buildings on it and their subsequent redevelopment.
If a retail company or developer does not find suitable free land for the construction of buildings intended for carrying out its economic activity, one option is to purchase land, including the buildings located on it, and then redevelop them. Depending on specific conditions, one of the following situations may occur.
Purchase of land, including old, rund-down buildings that are no longer suitable for use
In this case, for a retail company, the land will be included in the acquisition price as assets (031 – Land) and all costs related to the acquisition of buildings will be recorded on account 042 – Acquisition of tangible fixed assets (or on account 052 – Advances payments for tangible fixed assets). They will accumulate here, regardless of whether there is to be demolition and construction of completely new buildings afterwards, or if there is only to be reconstruction of the buildings and their further use. It always applies that it is included in the assets (021 – Buildings) only when it is put into a condition fit for use (see Section 7 (11) of Decree No. 500/2002 Coll.), at the same time a depreciation plan will be drawn up, and it will begin with applying accounting depreciation to costs. At the same moment, the conditions for tax depreciation are usually met (see Section 26 (5) of Act No. 586/1992 Coll. on Income Taxes); objects are classified into depreciation groups, and the application of tax depreciation to tax costs begins.
In the event that the buyer was in the position of a developer and the purchased real estate is to be used for subsequent sale, the purchase price of the buildings would be accumulated on account 121 – Work-in-progress, as of the approval date it would be transferred to account 123 – Finished products, and when the real estate is sold the purchase price would be posted on account 583 – Change in product status. The acquired land will be dealt with in the usual way. If it is sold together with buildings, its disposal would be recorded on account 541 – Net book value of disposed intangible and tangible assets.
Purchase of land, including functional buildings, which will require extensive reconstruction in the foreseeable future
The purchase of a commercial plant is a common transaction. In the case defined here, it could be considered more like a redevelopment “in its infancy”. Potential lessees are often transferred together with the real estate. The purchase price is recorded on account 042 – Acquisition of tangible fixed assets (or 052 – Advances payments for tangible fixed assets) and given that the status of being eligible for use according to both accounting and tax regulations (see above) has already been achieved with the seller, it will be included in the assets on the date of delivery of the proposal for deposit in the real estate register (see Section 56 (10) of Decree No. 500/2002 Coll.). At the same time, an accounting depreciation plan will be drawn up and buildings will be classified into tax depreciation groups and the application of tax depreciation to tax costs will begin. The subsequent reconstruction (or several partial reconstructions) will be treated as a normal repair or technical evaluation of fixed assets (for accounting and tax purposes).
However, there may be a situation where, at the time of implementation, the reconstruction would be inefficient compared to demolition and subsequent new construction, whether due to the wear and tear of the buildings or the obsolescence of the materials and technologies used. In this case, on the date of obtaining a building permit or demolition survey (or another date specified in the accounting guideline), the accounting entity shall remove the building in question from the accounting and record its net book value to account 042 – Acquisition of tangible fixed assets (see Section 47 (1)(f) of Decree No. 500/2002 Coll.). At the same time, they will claim only half of the annual tax write-off in the given tax period (see Section 26 (7)(a)(1) of Act No. 586/1992 Coll., on Income Taxes) and the tax net value will then enter into the purchase price of the new building, where for tax purposes the accountant will replace the net book value (see the last sentence of Section 29 (1) of Act No. 586/1992 Coll., on Income Taxes). Subsequently, the procedure is similar to that of new construction.
Purchase of land, including functional buildings with planned demolition and change of business from retail to developer
A hybrid situation can also arise, when a company – retail – purchases a commercial plant and continues to operate it for several years (e.g. renting out commercial premises, offices, warehouses). Subsequently, there will be demolition and construction of a new building, which from the very beginning is intended for sale – thus changing the “retail” business to a “developer” business.
When acquiring a commercial plant, the accounting unit proceeds in the same way as in the previous situation. The setting of the accounting depreciation plan must take into account the fact that in a certain time horizon (e.g. 5 years) the current operation will end and the building will be demolished. At that moment, the buildings will still have some value (they won't be ruins that an expert would value, for example, at CZK 1 when demolition begins), and it is therefore not possible to write off the buildings to zero. The net book value must therefore be estimated immediately when the buildings are classified. Buildings will be traditionally classified in the corresponding depreciation groups, and tax depreciation will be applied as usual throughout the entire period of operation.
At the time of the demolition decision, demolition order or building permit (or at another suitable date), the accounting unit removes the buildings from the accounting and transfers their net book value to account 121 – Work-in-progress. And it will continue in the next accounting as a developer (see the first case).
However, the impact on the corporate income tax base will be diametrically different. In the year the buildings are disposed, the accounting entity can only claim a tax write-off amounting to half of the annual write-off (see Section 26 (7)(a)(1) of Act No. 586/1992 Coll., on Income Taxes). The Income Tax Act does not recognise the possibility of converting the tax net value into the future product value. The accounting entity therefore applies the tax net value as a one-off expense in the disposal period (see Section 24 (2)(b) of Act No. 586/1992 Coll., on Income Taxes).
At the time of the sale of new buildings, the accounting entity must remember that the net book value, which was charged to account 121 – Work-in-progress from the disposal of liquidated buildings, must be excluded from tax costs (other items are tax-deductible expenses). In the event that it is a built apartment building with the gradual sale of housing units over several tax periods, this net book value must be gradually excluded from the tax costs by appropriate calculation.
