When an individual who is also registered as a sole proprietor sells real estate, the first practical question is which tax they must pay — tax under the simplified tax system (STS) as a sole proprietor or personal income tax (PIT) as an individual. The STS rate is usually lower and may at first glance seem more advantageous. However, if the property has been owned for a long time (more than 5 years) and meets the statutory criteria for PIT exemption (for example, an apartment), the seller may not have to pay PIT at all, whereas STS tax would still be payable in the same situation.

Neither regime guarantees an advantage in itself: in some cases the STS may apply together with VAT, and the progressive PIT scale can also make taxation less favourable. What matters, therefore, is not only the resulting tax burden but also the correct classification of the income from the sale of the property. A wrong choice can lead not only to overpaying tax but also to the Federal Tax Service reclassifying the income and assessing additional tax, penalties and a fine.

The general approach to taxing the sale of real estate

The same income must not be subject to both PIT and STS tax: its classification depends on whether the sale of the property is treated as a personal transaction of an individual or as business activity, i.e. activity carried out by the sole proprietor. A sole proprietor applying the STS does not pay PIT on business income, since such income is subject to the tax paid under the STS.

The correct classification of income is determined by the specific circumstances of the case (Ruling of the Constitutional Court No. 189-O of 31.01.2023). What matters is not how the seller is formally described in the contract but the actual nature of the activity in which the property was sold. Even if the contract is concluded in the name of an individual, this does not in itself rule out the income having been received in the course of business and being subject to STS tax (FTS Letter No. SA-4-7/8614 of 07.05.2019).

Personal income tax on the sale of real estate

Income from the sale of real estate is subject to PIT if the sale is not connected with the taxpayer's business. Accordingly, if an individual not registered as a sole proprietor sells real estate, the income received is subject to PIT.

At the same time, the fact that the seller is a sole proprietor is not in itself grounds for treating the sale of real estate as not subject to PIT. In such a case, what matters is not the seller's status but how the taxpayer actually used the property being sold.

The courts proceed from the need to assess all the circumstances together, including the purpose of acquiring the property, the period of ownership, whether there have been systematic real estate purchases and sales, the relevant business activity codes for selling property and the taxpayer's actual pattern of behaviour (Resolution of the Presidium of the Supreme Arbitrazh Court No. 6778/13 of 29.10.2013).

For example, if the seller's main registered activity code is 68.20 "Rental and management of own or leased real estate", code 68.10 "Buying and selling of own real estate" is absent, the seller has owned the property for a long time and has not previously bought property for resale, the Federal Tax Service, following this approach, treats the sale as the activity of an individual (Resolution of the Ninth Arbitrazh Court of Appeal No. 09AP-21641/2025 of 23.06.2025 in case No. A40-278480/2024). In that case, it is PIT that is payable. Thus the courts treat income from the sale of real estate as subject to PIT if the circumstances show that the property is being sold outside the scope of business activity.

STS tax on the sale of real estate

Income from the sale of real estate is subject to STS tax if the sale is recognised as part of the taxpayer's business activity, i.e. the business nature of the sole proprietor's activity lies precisely in selling such property, and not in any other dealings with it before the sale.

Recently, the following position has emerged in case law: where business activity was carried out with the property (for example, the premises were leased out), its sale is subject to STS tax. In applying this position, the courts focus on the use of the property for business purposes, but in such cases STS tax is applied taking into account other indicators by which the sale can be classified as business activity. For example, if after selling an apartment the sole proprietor bought other property that is also leased out, the courts conclude that STS tax must be paid (Resolution of the Arbitrazh Court of the Urals District No. F09-6139/25 of 03.02.2026 in case No. A50-6729/2025). It is therefore wrong to say that this approach is the direct opposite of the one described above.

In practice, indicators in favour of classifying income as business income usually include business activity codes related to buying, selling, leasing or managing real estate, use of the property as a business asset, multiple real estate sales and purchases, acquiring property for resale or systematic profit, and recording income from similar transactions in business accounts (Resolution of the Arbitrazh Court of the Moscow District No. F05-8609/2024 of 27.03.2025 in case No. A40-166406/2023). The purpose of the property itself is also relevant: for commercial real estate, a finding that ownership was personal is inherently less likely than for residential property (Resolution of the Arbitrazh Court of the Moscow District No. F05-11148/2025 of 30.07.2025 in case No. A40-225259/2024).

Possible risks

Incorrectly determining the tax payable on income from the sale of real estate may lead to the following:

1. Additional tax, penalties and fines
2. If the taxpayer pays PIT and the Federal Tax Service later treats the income as business income, the income may be reclassified and additional tax assessed. Moreover, such a mistake may result in a fine (20% / 40% of the unpaid tax) (Article 122 of the Tax Code).
3. Reclassification of all of the taxpayer's activity
4. Where there have been several real estate transactions, the Federal Tax Service or a court may conclude that the taxpayer's conduct is systematically entrepreneurial and revise the tax consequences of several transactions at once (Cassation ruling of the Second Cassation Court of General Jurisdiction No. 88a-27028/2023 of 01.11.2023).

Conclusion

Case law on the taxation of real estate sales by sole proprietors on the STS shows 2 approaches. Under the first, the courts hold that for the STS to apply, the sale itself must be entrepreneurial in nature. Under the second, the use of the property in business is already treated as a significant argument that its subsequent sale is also connected with business activity. In practice, however, such cases usually involve other indicators of business activity as well, which suggests that the two approaches are not direct opposites.

Ultimately, what is decisive is not only the type of property and the period of ownership but also the purposes for which it was acquired, how it was used, whether there are signs of systematic real estate dealing and the taxpayer's own chosen pattern of behaviour.

The seller's practical task is therefore not only to compare the tax burden under PIT and the STS but also to correctly determine the legal nature of the income received.

C Cases recommendations

The C Cases team recommends:

1. Before selling the property, determine whether the sale is a personal disposal of property or part of business activity;
2. Check your business activity codes and any signs of systematic real estate dealing.
3. Develop a single tax position on the transaction and reflect it consistently in the contract, reporting and cash flows.
4. If there are contentious indicators, prepare arguments and a set of documents in advance supporting the "personal" nature of ownership if you rely on PIT, or its business nature if you pay STS tax.

If, as an individual registered as a sole proprietor on the STS, you plan to sell real estate and want to assess the tax consequences in advance and reduce the risk of additional assessments, the C Cases team is ready to carry out a comprehensive analysis of your real estate transactions, prepare a position on applying PIT or the STS and support the transaction.

Sources

1. Tax Code of the Russian Federation (Part Two) No. 117-FZ of 05.08.2000;
2. Ruling of the Constitutional Court No. 189-O of 31.01.2023;
3. Resolution of the Arbitrazh Court of the Urals District No. F09-6139/25 of 03.02.2026 in case No. A50-6729/2025;
4. Resolution of the Ninth Arbitrazh Court of Appeal No. 09AP-21641/2025 of 23.06.2025 in case No. A40-278480/2024;
5. Resolution of the Arbitrazh Court of the Moscow District No. F05-8609/2024 of 27.03.2025 in case No. A40-166406/2023;
6. Cassation ruling of the Second Cassation Court of General Jurisdiction No. 88a-27028/2023 of 01.11.2023;
7. Resolution of the Presidium of the Supreme Arbitrazh Court No. 6778/13 of 29.10.2013;
8. Letter of the Ministry of Finance No. 03-04-05/60201 of 28.06.2023;
9. FTS Letter No. SA-4-7/8614 of 07.05.2019.