When selling a property, it is common to think that no taxes will be paid on the capital gain obtained. Especially if the money is reinvested in another house or if the seller is over 65 years old. However, these tax exemptions, provided for in the Spanish Personal Income Tax, are not automatically applied. Everything will depend on whether the sold property is considered a “habitual residence” for Income Tax purposes. This concept has a specific definition in tax regulations and requires compliance with certain use and minimum stay requirements that are often unknown. We take a closer look below.
IRPF Law. No direct definition, but clear implications.
Law 35/2006, of November 28, on the Personal Income Tax, does not contain a literal definition of “habitual residence.” However, it is the law that establishes the general framework of the tax and regulates the cases in which certain exemptions may apply.
For example, article 38 establishes that gains obtained from the transfer of the habitual residence are exempt from taxation, provided that the amount is reinvested in another habitual residence. Similarly, article 33.4.b) establishes that gains obtained by individuals over 65 years old, or persons in a situation of severe or great dependency, when transferring their habitual residence; are exempt from tax.
So, what does the Tax Agency understand by “habitual residence”?
Personal Income Tax Regulation. Clear definition and time requirements.
Royal Decree 439/2007, of the IRPF Regulation, does offer a clear and detailed definition of the concept. Article 41 bis establishes that a property is considered habitual when it has been effectively and permanently occupied by the taxpayer within a period not exceeding 12 months from acquisition or completion of works. In addition, it requires that the taxpayer has resided there for a minimum of 3 continuous years. Unless there are justified reasons that have prevented prolonged occupation. For example, job changes, separation, death, etc.
Proof requirements to consider a property as habitual residence.
The concept of habitual residence is a factual concept, not purely legal. This means it must be proven by the taxpayer by any means of evidence admitted by law. It is often thought that being registered as living in the property is sufficient to prove this condition. However, the General Directorate of Taxes – D.G.T (official advisory body in tax matters) has reiterated in several binding consultations that this is not the case. Neither is it sufficient to register for the Economic Activities Tax (I.A.E) or to declare that property as your tax address.
To prove habitual residence, it is advisable to have as much evidence as possible. Water and electricity bills, bank correspondence, and in general, any document demonstrating effective and permanent use of the property.
Conclusions.
If you are thinking of selling your property and want to ensure that you meet the requirements to apply the tax exemptions under the IRPF, at White Baos Abogados we can assist you. Do not hesitate to contact us. We will analyse your case and offer you expert legal advice on this and other matters related to real estate law.
The information provided in this article is not intended to be legal advice but merely conveys information relating to legal issues.
Carlos Baos (Lawyer)
White & Baos.
Tel: +34 966 426 185
E-mail: info@white-baos.com
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