Capital Gains on the sale of Property in Spain: keys to reduce taxation

Keys to reduce taxation

Most of my clients ask us about this tax issue once they decide to sell their property in Spain.

They want to anticipate the tax bill, especially if they have invested a lot of money in the property.

Many of them have invested heavily in improving or renovating the property and the tax authorities are very rigorous when it comes to accepting these expenses to reduce the taxable income.

Taxation will depend mainly on the taxpayer's situation, which can basically be divided into whether the taxpayer is an individual, resident or non-resident for tax purposes in Spain, Europe or outside the European Union. The tax rate to be applied, the possibility of the gains being exempt and other situations will depend on this factor.

For example, if we are talking about a tax resident in Spain, the tax rate is progressive (from 19% for gains of up to €6,000; to 28% if they are more than €300,000) and the personal and family minimums are applicable, which reduce the net savings base, which is where the capital gains are included, according to the tax scheme.

The taxable base is the result of reducing the sale price by the purchase price and all the expenses related to the purchase and sale of the property.

If you are a tax resident belonging to the European Union, including Norway and Iceland, the tax rate will be 19% fixed on the net taxable base (without applying the personal and family minimums to the taxable base) and is determined in the same way as for tax residents so as not to infringe their rights and so that they have the same tax treatment.

As mentioned above, the law allows you to include all the expenses related to the purchase and sale of the property (provided that you keep the corresponding supporting documents), the most common of which are as follows:

-Notary fees (notarisation of the agreement to purchase the property).

-Land registry (expenses for registration in the land registry to publicise the act and thus give value to your right before other people).

-Real Estate Commission

-Energy efficiency certification

-Plusvalía

-Legal services or any other kind of services.

-Etc...

It is also important to point out that if the property was rented and enjoyed deductions in the Personal Income Tax form 210, for depreciation of the property, these amounts will be considered as a lower acquisition value, so be careful with these deductions.

Furthermore, in the case of a non-EU non-resident, in the event of divorce, if the marriage was constituted as community property, the division of the property will produce a capital gain for both spouses.

PLUSVALIA

We would like to point out that the term "Plusvalia" is usually used when referring to the gain obtained when the ownership of a property is transferred, but the truth is that the Plusvalia is a municipal tax and is an additional tax to the State Tax and they are complementary: they are two taxes that arise when the property is transferred.

Their nature is different, since the taxable event of the PLUSVALIA is the increase in the value of urban land caused by the mere passage of time and the amount of the tax will depend on:

-value of the plot

-number of years since you have owned the property.

Each Autonomous Community has its own regulation on this tax, therefore, this tax will be different depending on the location of the property.

This tax is 100% deductible and since recently, in case of no profit in the sale of the property, it will be exempted from payment.

Now that we are clear about which expenses are tax deductible, what about expenses related to renovations?

This is a very important question because most of my clients invested a lot of money many years ago and now believe that they can reduce their taxable income thanks to these expenses.

The Personal Income Tax Act states that you can only reduce the gain with the expenses that were paid to make improvements and increase the extension of the property, but the expenses for renovation or conservation and repair are not allowed.

What does the Tax Agency consider to be the cost of refurbishment?

REFORMS are maintenance, conservation and repair actions to restore the deterioration and restore the property to the same conditions of use as at the time of its construction, in order to contribute to maintaining the same useful life, the same habitability and the same production or use capacity.

For example

- replacement of old floors, windows and air-conditioning machines.

- in the case of the installation of floating floorboards throughout the dwelling, wood panelling on some walls, complete remodelling of bathrooms and kitchen, installation of new electrical switchboard, removal of "gotelé" and painting of walls.

- plumbing installations

- repairs to the sewage system

- alterations to aluminium and wood carpentry in doors and windows, as well as waterproofing work

- changes of taps, electrical installation, repair of walls and roofs, and painting

- cleaning of pipes, scraping and painting of ceilings and walls, and tiling.

Most of these expenses will be rejected by the Tax Agency according to the latest and most current court rulings and criteria of the Tax Agency, therefore, be careful with these expenses because you will not be entitled to include them in your tax return.

On the other hand, we can reduce the benefit if we can prove that these expenses were made to increase the extension or brought improvements to the property.

IMPROVEMENTS AND INCREASE IN EXTENSION COSTS

According to the law and the ordinance, these are works borne by the taxpayer, and through which the taxpayer creates new rooms, buildings or structures that did not exist before, and which become part of the fixed assets of the property, increasing its capacity or habitability.

If you decide to install an air conditioning system in a property that did not exist before, you will have to prove this fact with photos, certification from the supplier and, if necessary, a building permit.

Therefore, if you only change the devices, then you cannot not include this as an expense in your calculations.

The tax office will certainly require you to check these expenses:

- building project stamped by the architects' association, describing the actions to be carried out.

-a municipal building permit authorising the start of the structural work or extension of the property

-Detailed estimate from the builder

-Final works certificate

-Certificate of first occupation

-Invoices and means of payment (bank receipts).

Invoices are the most important means of estimating the cost, but they are not sufficient.

Therefore, it is very important to collect all the necessary documentation to be able to plan for the future taxation of the sale of a property, otherwise the tax impact can be very significant.

In Alicante on 5 May 2023

Gabriel Díaz García

Financial and Tax Advisor

Economist Alicante Bar Association no. 3611

Mapfre Wealth Manager in Alicante