When it comes to paying taxes, it is essential to be expertly advised. Proper knowledge of the applicable exemptions and allowances can lead, depending on each case, to significant savings for the taxpayer. One of the most relevant exemptions established in the Spanish Personal Income Tax Law is the one known as “Reinvestment in main residence”. Although its application seems quite simple, a Binding Consultation issued by the Directorate General of Taxes last year promises to change our understanding of how this exemption really works. In today’s article we explain the most important features of this exemption and the major difference we can expect from now on.
In which cases can be applied?. Capital gains obtained from the sale of the habitual residence.
Let’s illustrate this in a simple way. A person acquires a home for 150,000€ and turns it into his or her main residence. Several years later, the property is sold for 200,000€. The 50,000€ gap between the purchase and sale price is considered, for tax purposes, a capital gain. Logically, this amount must be declared to the authorities and will be taxed at a rate of between 19% and 23%.
However, there are several cases in which, by law, this capital gain is exempt. For example, those over 65 years of age who sell their main residence will not have to pay tax on any gain they may have made. The same will apply to people who are in a situation of severe or great dependency. The other main exemption, foreseen in article 38 of Personal Income Tax, is the so-called “reinvestment in the main residence”. How does it really work?.
Reinvestment in main residence. How does it work exactly?.
To apply for this exemption, it is essential that the amount obtained from the sale is reinvested in a new main residence. How?. Either by acquiring a new home, or by using the funds to rehabilitate what will be our new main residence. The reinvestment can be made in a single payment or in fractions, as long as it done in less than two years. But, it could be understood that the property acquired or renovated had to be located in Spanish national territory?
Binding Consultation V2910-21 of the Directorate General for Taxation.
As we previously noted in another article, it could be against the law to require that the reinvestment is made in the same country. This was the judgement of the European Court of Justice in its ruling of 26 October 2006, against our neighbouring country, Portugal. More recently, the Spanish Directorate General of Taxes has clarified that the habitual residence to be acquired or rehabilitated can also be located abroad. However, it is essential that the vendor was a tax resident in Spain the year that the sale took place.
Returning to the example used a few paragraphs ago. A British expatriate sells his habitual residence, located in Spain, in 2021, for 200.000€. Afterwards, he returns to his country. He will then use the funds obtained from the sale to purchase another home in the UK, in 2022, which he will turn into his new habitual residence. Would this British citizen have the right to benefit from the exemption for reinvestment in main residence?. The answer is YES.
If you are thinking of selling your property in Spain, do not hesitate to contact us. At White-Baos we will study your case and offer you expert advice throughout the whole process. From the compilation of all the relevant documents, preparation of the contracts or signing of the deed at the Notary’s office, to the most advantageous taxation for you.
The information provided in this article is not intended to be legal advice, it simply conveys information related to legal issues.
Carlos Baos (Lawyer)
White & Baos.
Tel: +34 966 426 185
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