After developed real estate is restored to the heirs of the former owners, it is usually necessary to divide the regained property among its co-owners. This often raises both legal and tax issues.
In practice, inheritance usually involves multiple heirs. In the case of pre-war urban buildings in Poland, the co-owners often were persons who were unrelated to one another. This accidental type of joint ownership then carries over to the legal successors of the former co-owners and continues through the end of the reprivatisation proceedings. Because joint ownership is generally a temporary or interim state, and often accidental, it is desirable from the point of view of the heirs to eliminate the joint ownership of reprivatised real estate.
The right to seek elimination of joint ownership is one of the most important entitlements of any co-owner under Art. 210 of the Civil Code. This right may be excluded by agreement of the co-owners for a period of five years. During the last year of such period, it is permissible to extend it for another five years, and subsequently one more time. Thus the maximum period in which the right to eliminate joint ownership may be excluded is 15 years.
Generally the regulations provide for two procedures for eliminating joint ownership: through a civil-law agreement or through a non-adversarial judicial proceeding.
Contractual elimination of joint ownership requires the consent of all the co-owners, who must also indicate the manner in which joint ownership will be eliminated. Contractual elimination of joint ownership may be conducted at any time, and more specifically it is irrelevant whether the parties have concluded an agreement excluding the possibility of demanding elimination of joint ownership, as referred to in Civil Code Art. 210, and thus contractual elimination of joint ownership is permissible and effective even if the parties have entered into such an agreement. Generally, an agreement eliminating joint ownership may be concluded in any form, but if the validity of the legal act requires that it be made in a specific form, it should be made in that form. This is relevant in the case of elimination of co-ownership of real estate, which requires a notarial deed (Civil Code Art. 158).
If the co-owners cannot agree on elimination of joint ownership, any of the co-owners may apply to the court for elimination of joint ownership. Unlike the case of contractual elimination of joint ownership, however, conclusion of an agreement excluding the elimination of joint ownership for a certain period will be binding on the court, which must deny the application if it is filed when such an agreement is in force.
In practice, elimination of joint ownership of reprivatised real estate raises issues under civil law and tax law. Often elimination of joint ownership is accompanied by distribution of a decedent’s estate, and the exit strategy that is adopted will generate specific tax consequences.
It appears that one of the safest and most tax-efficient methods of eliminating joint ownership of real estate is conclusion of an agreement in the form of a notarial deed on distribution of the decedent’s estate together with elimination of joint ownership of the property. This approach is possible with respect to a specific building as well as separate units meeting the criteria set forth in Art. 2 of the Act on Ownership of Premises of 24 June 1994.
This approach involves elimination of joint ownership through partition of the real estate and allocation to a specified group of heirs of the exclusive ownership and joint perpetual usufruct of specific portions of the property. The agreement on distribution of the estate would result in a proportional increase in the share of each member of the group of heirs in the joint ownership and joint perpetual usufruct with respect to the portion of the real estate they assume, while at the same time eliminating their share in the joint ownership and joint perpetual usufruct of the portion allocated to another group of heirs. The agreement would provide for an appropriate equalising payment to cover the difference in value in the shares of the partitioned property received by the members of each group of heirs and the market value of the real estate. Under this approach, only the equalising additional payment would be subject to taxation, and only with respect to VAT and personal income tax. These taxes on the amount of the equalising additional payment would have to be paid by the heirs who received such payments.
This solution would not generate liability for estate and gift tax under Art. 1 of the Estate and Gift Tax Act of 28 July 1983, or for the tax on civil-law transactions under the Act on the Tax on Civil-Law Transactions of 9 September 2000.
This approach has been confirmed in individual tax interpretations issued by the Polish Ministry of Finance, recognising the permissibility of this method of elimination of joint ownership as well as the model for taxation of the transaction.
Krzysztof Wiktor and Barbara Majewska, Reprivatisation Practice, Wardyński & Partners