TAXES ON THE SALE OF SPANISH PROPERTIES

Capital Gains Tax When Selling a Property in Spain

If you have decided to sell your Spanish property, it is important to understand how Capital Gains Tax may affect the transaction.

In general terms, the taxable capital gain is calculated by comparing the property’s acquisition value with its transfer value, taking into account certain taxes, expenses and qualifying investments or improvements.

The following concepts are particularly important.

1. Property Acquisition Price

The acquisition price is the amount originally paid to the seller when you purchased the property.

This normally corresponds to the purchase price stated in the Spanish title deed (Escritura Pública de Compraventa).

This amount forms the starting point for calculating the capital gain generated when the property is subsequently sold.

2. Expenses and Taxes Paid on Acquisition

Certain expenses and taxes connected with the original purchase of the property may be added to the acquisition value for Capital Gains Tax purposes.

These may include, depending on the circumstances:

Property Transfer Tax (Impuesto sobre Transmisiones Patrimoniales – ITP).
VAT and Stamp Duty, where applicable.
Spanish notary fees.
Land Registry fees.
Legal fees directly related to the acquisition.
Other expenses directly connected with completing the purchase.

It is therefore important to retain the invoices, tax receipts and other documents relating to the original purchase.

The higher the properly documented acquisition value, the lower the potential taxable capital gain may be when the property is sold.

3. Renovations and Improvements to the Property

One of the most common questions from property owners is whether the cost of renovations carried out after the purchase can be taken into account when calculating Capital Gains Tax.

Not every repair, refurbishment or maintenance expense will necessarily qualify.

A distinction must generally be made between investments or improvements to the property and ordinary maintenance or repair expenses.

Works that genuinely improve the property, increase its capacity, substantially alter it or form part of a significant renovation may potentially be relevant when determining the property’s acquisition value.

By contrast, ordinary maintenance, decoration or replacement of elements because of normal wear and tear may receive different tax treatment.

For this reason, the exact nature of the works and the supporting documentation should always be reviewed before assuming that an expense can be used to reduce the taxable capital gain.

Major Building Works

Major renovation or construction works usually involve works of a certain technical or structural importance.

Depending on the municipality and the type of project, these works may require a Major Works Licence (Licencia de Obra Mayor), together with a technical project prepared by an architect, engineer or other qualified professional.

Typical examples may include:

Comprehensive renovation of a property.
Works affecting the structure of the building.
Works affecting foundations, load-bearing elements, façades or roofs.
Extensions increasing the constructed area, height or volume of the building.
New construction.
Demolition works.
Property subdivisions or significant redistribution projects.
Changes of use of a building or premises.
Works affecting common structural elements of a building.
Certain works connected with fire protection or building safety.
Major refurbishment of commercial premises.

Where there is an architect’s project, building licence and properly documented invoices, these documents can be extremely important when determining whether the expenditure may be treated as an investment or improvement for tax purposes.

The technical project will often contain a budget or estimated construction cost. However, the amount that can ultimately be taken into account for tax purposes must be supported by the appropriate documentation and must correspond to expenditure that qualifies under the applicable tax rules.

For this reason, the tax treatment should be reviewed on a case-by-case basis.

Minor Building Works

Smaller refurbishment works may instead be subject to a Minor Works Licence (Licencia de Obra Menor), a prior notification or another simplified municipal procedure, depending on the relevant Town Hall.

These works are normally less technically complex and may not require a full architectural project.

Examples may include:

Interior refurbishment.
Replacement of floors or wall coverings.
Painting and decoration.
Kitchen renovation.
Bathroom renovation.
Replacement or modification of internal installations.
Plumbing works.
Electrical works.
Heating or air-conditioning installations.
Minor internal partition changes.
Accessibility improvements.
Other small-scale refurbishment works.

The fact that works have been carried out under a minor works licence does not, by itself, determine their tax treatment.

The important issue is to establish what type of expenditure was actually incurred, whether it represents an investment or improvement rather than ordinary maintenance, and whether sufficient supporting documentation is available.

For this reason, we recommend keeping all:

Invoices.
Proof of payment.
Building licences.
Architect or engineer reports.
Technical projects.
Municipal documentation.
Certificates of completion of works.

These documents may be required in the event that the Spanish Tax Authorities ask for evidence supporting the amounts included in the Capital Gains Tax calculation.

4. The 3% Withholding for Non-Resident Sellers

A particularly important rule applies when the seller of a Spanish property is not tax resident in Spain.

When a non-resident sells Spanish real estate, the buyer is generally required to withhold 3% of the agreed purchase price.

This amount is not paid directly to the seller.

Instead, the buyer must pay the 3% withholding to the Spanish Tax Authorities as a payment on account of the seller’s potential Capital Gains Tax liability.

For example, if a property is sold for:

€300,000

the buyer would normally retain:

€9,000 – representing 3% of the sale price

and pay the remaining amount to the seller, subject to any other deductions or payments agreed as part of the transaction.

It is important to understand that this 3% withholding is not necessarily the final amount of Capital Gains Tax payable.

It is a payment on account.

After completion of the sale, the seller’s actual capital gain must be calculated and the corresponding tax return submitted.

Three situations may therefore arise:

If the final Capital Gains Tax liability is higher than the amount withheld, the seller must pay the difference.
If the tax liability is equal to the amount withheld, no additional amount will generally be due.
If the tax liability is lower than the 3% withheld, the seller may be entitled to request a refund of the excess amount from the Spanish Tax Authorities.

Why Proper Documentation Is Important

Before selling a property in Spain, it is advisable to review all documents relating to both the original purchase and any subsequent improvements.

Documents such as the original purchase deed, tax receipts, notary invoices, Land Registry invoices, legal invoices, building licences, architect’s projects and renovation invoices may have a direct impact on the calculation of the taxable capital gain.

A proper review of these documents before completion of the sale can help ensure that the Capital Gains Tax calculation is made correctly and that all legally admissible acquisition costs and improvements are taken into account.

CAPITAL GAINS CALCULATION

Sales of Spanish properties derive Capital Gains liability to vendors.

Caiptal Gains Tax to pay is the 19 % of the “Net profit” of the sale.

To obtaining what is the “Net profit” of the sale you need to follow up this formula:

Price of the sale – Price of acquisition – Expenses and Taxes on acquisition – Cost of “structural reforms” made on the property

Example of Capital Gains calculation:

You bought a resale property in 2015 for a price of 200.000 EUR.
On that moment, you paid 24.000 EUR, which is the 12 % of expenses: 10 % Transfer tax + 2 % notary, land registry, solicitor fees, etc.
Then, you made internal reforms for 17.000 EUR (change of tilling of the floor, repairing the pool, and new windows).
Some years later you built a garage for a value of 20.000 EUR

Then, you decided to sale now for a price of 260.000 EUR.

What is the Capital Gains derived from this sale?

NOTE: Before we make the calculation, we need to inform that the Spanish administration will consider all the above concepts to reduce the tax, except the one for “internal reforms” for 17.000 EUR value. The reason of this is because “internal” reforms which are not “structural” reforms are not considered for tax benefits.

We use the formula:

260.000 (Price of the sale) – 200.000 (Price of acquisition) – 24.000 (Expenses and taxes on acquisition) – 20.000 (New Garage) =

16.000 EUR

This is the “Net profit” to be obtained with the sale

As the rate for Capital Gains is 19%, then, the amount of the tax for Capital Gains will be:

16.000 * 19 % = 3.040 EUR

WAY OF PAYMENT OF CAPITAL GAINS

1.- FOR SPANISH NON TAX RESIDENTS

Being you NON tax resident in spain, the way in which you pay Capital Gains is the following:

ON COMPLETION OF THE SALE: 3 % RETENTION: On completion of the sale, the Spanish administration forces the buyer to make a RETENTION of the 3 % from the value of the Price of the sale. So, you do not receive the full agreed price. The buyer keeps the 3 % of the total price and he has the obligation to deposit it at the Tax office. This is done “the same day of completion of the sale”.

NOTE: Following the above example, in case the price of the sale was 260.000 EUR, the retention tlo be made by the buyer would be 260.000 * 3 % = 7.800 EUR.

BEFORE 4 MONTHS AFTER COMPLETION OF THE SALE: DECLARATION OF CAPITAL GAINS 19% appicable to both, EU and NON EU nationals): After completion of the sale, you have 6 months to present the “Capital Gains Declaration” to the Spanish tax office. In this declaration, you (or your lawyer), must calculate the tax following the above example. In this case, the amount that you have to pay is of 3.040 EUR.

NOTE: As explained here, the CG derived from this transaction is of 3.040 EUR. As you were retained with a higher amount (7.800 EUR), then, you have a “credit” with the Spanish administration for the difference.

So, if the Spanish administration holds from you 7.800 EUR for CG Tax, as the final result of the tax is only 3.040 EUR, then, the Spanish administration must “refund” you the difference: 7.800-3.040 = 4.760 EUR.

How to claim for this refund? Your lawyer has to include this fact on the same Capital Gains Declaration, to present to the Tax office.

2.- CAPITAL GAINS IN CASE OF SPANISH TAX RESIDENTS

In case that you are considered as “Spanish Tax Resident” (which means that you are paying your income tax in Spain as a Spanish resident), then, once calculated the Capital Gains, you will have the following benefits on the tax:

NO CAPITAL GAINS FOR PERMANENT RESIDENCE:

- In case the property you are selling is your permanence residence (you have bee using it for more than 3 years as your “permanent home”), then you will have the following benefits:

- - If you are younger than 65 years old: You do not pay CG for the amounts of the sale obtained “reinvested” in the acquisition of a new property to be used as your permanent residence. You have 2 years to practice this “reinvestment” (passed 2 years without invest those amounts, you will be taxed in full).
  - If you are older than 65 years old: You do not pay CG for the amounts obtained on the sale. And this even if you do not “reinvest” in a new property.

- - NO 3 % RETENTION: On completion of the sale, you receive the full amount of the price from the buyer with no retention applicable.

NOTE: Usually owners confuse the “Spanish Tax Residence”, with the “Spanish Residence”.

In other words, people think that the “Spanish Residence Card, or “Residence Certificate” obtained in the Spanish National Police, is enough to demonstrate that they are “Spanish Residents for Taxes”, and, unfortunately, this is not the case.

The “Spanish Residence Card” (or “Spanish Residence Certification“), is not the valid document to change your Tax consideration as “Tax Resident”.

The Spanish Residence Card (or Certificate) only serves to declare that you are “living” in Spain, in order to facilitate the Police to have a better control over the residents in a determinate area.

In order to become Spanish resident for taxes, and then start to pay your Taxes in Spain as a normal Spanish citizen, you must obtain the SPANISH RESIDENT TAX CERTIFICATION issued by the Spanish Tax Office or Spanish Customs, and then you will start to pay your taxes in Spain, and not in your country of origin.

And, also, once you need to declare to the Tax of office from your country that you are Spanish Tax Resident, and that you do not wish to continue as Tax Residence on your country-

So, please, check with your tax adviser the taxes that you are currently paying because, even if you are not Spanish Resident, you should be declaring and paying the INCOME TAX NON RESIDENTS.

SOME QUESTIONS ABOUT THE 3 % RETENTION IN CASE OF SALE OF NON RESIDENTS

Why to practice the 3% retention from the seller?

Because it represents a guarantee for the Spanish administration that the taxes derived from the capital gain obtained by the seller will be paid in Spain.

What happens if the 3% retention is not paid?

In the event that the retention is not practiced by the buyer, the Spanish administration may execute the debt for said payment in the goods or properties object of the sale.

With which, in the event that the buyer does not make the payment, nor does he withhold the seller, he may suffer the eventual processes of execution of the debt, and in his case, seizure of the acquired property.

Once the 3% retention has been applied, what does the seller have to do?

You will have to present the tax declaration, that model 210, within a period of four months from the date of signing the sale.

In this case, in the event that less than the amount resulting from the calculation of the capital gain has been withheld, that is, if €10,000 has been withheld from the seller, and the result of the calculation of the capital gain is €15,000. , you will have to contribute the remaining €5,000 with the presentation of the 210 model, within four months after the date of sale.

Otherwise, if the seller has withheld an amount greater than the amount resulting from the payment of capital gains tax, he will have the right to have that amount returned. This must be presented within four months from the date of sale.

It is important at this point, that is, in the event that there is a right of return of 3%, or part of said retention to the Spanish administration, this will require the seller to have previously complied with the tax obligations to which that he was obliged as an owner in Spain in his concept of non-resident. That is, to the presentation of the annual imputed income tax of the IRPFNR, of second residence, to which all property owners in Spain are obliged as non-residents. Normally, this obligation will be required for a period of four years. In other words, the Spanish administration will not demand that imputed income taxes be regularized, not paid beyond the last four years prior to the date of sale.

How much time does the Spanish administration have to return the excess of 3% withheld?

The administration has 6 months to return the excess retention made. After 6 months, the administration will be obliged to return said amount together with late-payment interest.

Special care must be taken with the term of the return since the Spanish administration can take in some cases more than a year to carry out the return.

It must also be taken into account that the administration has up to FOUR YEARS and one month starting from the date of the sale (art. 5 from the law of the model 210 (https://www.boe.es/buscar/doc.php?id=BOE-A-2010-19707) to practice the return or reimbursement. Therefore, in the event that it takes you more than a year to obtain a refund, you will need to hire the services of a specialist to paralyze the expiration periods of the right to obtain a refund.

Is there an obligation to practice retention of 3%, in the case of donations of properties in Spain?

In the case of donations of properties located in Spain, since these are free, there is no price to pay for them, that is, there is no consideration, there is no obligation to withhold 3% of the value of the donation or entering it through model 211.

In the case of condominium dissolution, or extinction of co-ownership, is it mandatory to withhold 3%?

Not normally . In other words, the dissolution of the condominium is a neutral dispositive act, which does not generate a patrimonial transfer for any of the parties. Therefore, it is not considered that there is a profit.

However , in the event that one of the co-owners is awarded a part greater than the one that belongs to him , in this case, it will be considered that said part constitutes a capital gain for the co-owner, with which, retention must be practiced. of 3% on said excess part .

In other words, for example, let’s imagine that there is a case in which “A” and “B” have a property in Spain in which 65% is shared for “A” and 35% for “B”. In this case, if a condominium dissolution occurs in which it is established that each one keeps 50% of the property, it will be considered that “B” has obtained 15% more than what he has contributed. That is, contributing a value of 35% obtained a result of 50 %, with which, that 15% surplus will be considered as a capital gain, and “A” will be forced to retain 3% of the value of that 15% to ” B”.

In the same way, let’s imagine that there is another example in which ” B” receives, in addition to his 35% of the property, a cash conversation of €50,000. In the same way, said compensation in cash would be subject to 3% retention, because it represents one of the existing assets of “B”.

OTHER TAXES FOR VENDORS-PLUSVALÍA

Mainly, the PLUSVALÍA, is a tax over the increase of the value of the land in which your property is, from the buying and the selling time. It is the sole tax that we are not in the position to calculate previously to the sale, because depends on specific criteria from the Town Hall.

In these cases, a retention from the buyer to the seller is enough to cover the payment of this tax. Overall when seller is leaving the country after the sale.