Termination of Co-Ownership in Spain: Extinction of Condominium
The Extinction of Condominium (EC), also known as Termination of Co-Ownership, is a legal mechanism in Spain that allows one co-owner of an indivisible asset (typically a property) to acquire full ownership by compensating the remaining co-owners. This type of transaction is common in cases of divorce, inheritance, or co-purchases.
What Is a Condominium or Co-Ownership?
A condominium exists when a property is jointly owned by two or more individuals. Common situations include:
- Joint purchases, where multiple individuals acquire a property together.
- Inheritance, where multiple heirs inherit the same property.
- Court rulings, such as those resulting from divorces or other judicial proceedings.
Methods to Terminate Co-Ownership in Spain
There are two main methods to dissolve co-ownership:
1. Judicial Termination
This occurs through a court ruling:
- Divorce cases: Courts may award full ownership of a jointly owned property to one spouse.
- Other judicial proceedings: A judge may issue a decision that terminates co-ownership.
The court’s sentence is presented to the Spanish land registry to formalize the change in ownership.
2. Private Agreement Between Co-Owners
One co-owner agrees to buy out the share of another. This is the most common and simplest route when both parties are in agreement.
Tax Advantages of Extinction of Condominium
The key advantage of EC lies in taxation:
- Standard property transfers are taxed at 6–10% (depending on the region).
- Extinction of Co-ownership is taxed at only 0.5–1.5%, as it is not considered a sale.
Example:
- A and B purchase a property in Málaga for €150,000.
- Two years later, they divorce. A agrees to buy B’s 50% share for €75,000.
- If considered a sale, Transfer Tax in Andalusia would be 8% = €6,000.
- Under EC rules, the tax is only 1.5% = €1,125.
- Tax savings: €4,875.
This makes EC an ideal option in divorce or inheritance cases.
Mortgage Considerations
If the property has a mortgage, caution is needed:
- Even if one party is removed from the land registry, they may still be liable for the mortgage if the bank does not release them.
- Always consult your bank before proceeding to ensure proper mortgage restructuring.
Conditions for EC to Be Valid
To benefit from the reduced tax:
- There must be compensation (monetary or otherwise).
- If no compensation is given, the transaction may be considered a donation, subject to donation tax.
- If compensation is given in goods or other assets, the transaction may be classified as a barter (swap) and taxed as a sale.
Donation vs. Extinction of Co-Ownership
If one co-owner gives their share without compensation:
- It is not an EC.
- It is treated as a donation.
- Donation tax varies by region.
Example in Valencia:
- Donations between parents and children may benefit from an exemption of up to €100,000.
- No exemptions apply between spouses.
- Donations between unmarried individuals are taxed heavily.
Thus, to benefit from EC’s tax advantages, a payment or compensation is essential.
Taxation in Case of Barter (Swap)
If compensation is made using an asset instead of cash:
- The transaction is considered a swap.
- Taxed as a sale, subject to Transfer Tax.
In the Valencian Community, EC benefits from a reduced tax rate:
- Documented Legal Acts Tax: 1.5%
- Regular purchase: up to 10%
So, EC is fiscally preferable when compensation is monetary.
Non-Resident Taxation and Excess of Adjudication
Non-residents are generally not subject to the 3% withholding if:
- There is no excess of adjudication.
If there is an excess (e.g., one party receives more than their original share), then:
- The excess is subject to 3% withholding tax under Article 25.2 of the Spanish Non-Resident Income Tax Law.
Example:
- A owns 65%, B owns 35%.
- B ends up with 100% ownership.
- The additional 65% (beyond B’s original 35%) is an excess of adjudication.
- This portion is subject to taxation.
Legal Sources
- Royal Decree of July 24, 1889
- Royal Legislative Decree 1/1993 (Transfer and Stamp Duties Law)
- Spanish Non-Resident Income Tax Law
- General Tax Management Regulations
Final Recommendation
Extinction of Co-Ownership is a strategic, cost-efficient tool when dissolving shared ownership of Spanish properties, especially in family contexts. However, it must be properly structured, with adequate legal advice, to:
- Ensure tax efficiency
- Avoid reclassification as a donation or sale
- Coordinate mortgage implications
Always consult an experienced legal advisor before proceeding with an EC.
