When selling or donating a property, whether residential or commercial, it is important to understand the tax implications involved. In many cases, the transfer of a property not only implies the transfer of assets but also an alteration in wealth that must be reflected in the Income Tax Declaration. In this article, we explain in simple terms what capital gains and losses are, and how Real Estate Income Taxation works in certain special cases in Spain.
What are Capital Gains and Losses?
Capital gains and losses arise when there is a change in your wealth, as occurs when you transfer property to another person. According to Article 1.462 of the Spanish Civil Code, the property of the real estate is considered transferred when the buyer takes possession of the property. If the transfer is made through a public deed, unless stated otherwise, it is understood that the delivery of the property happens in the same act. This means that the tax accrual (the obligation to pay) occurs at the signing of the deed.
In tax terms, if you sell a property for a price higher than what you paid for it, the difference will be considered a capital gain. If you sell it for less than you bought it, it will be a capital loss. This difference must be included in your Income Tax declaration of the year in which the sale takes place.
What is Deferred Taxation? Suspensive Condition.
In some cases, the accrual of capital gains may be deferred. This means that the obligation to pay taxes on that gain do not arise immediately and is postponed to a later time. This happens when a Suspensive Condition is set. For instance, a father donates a property to his son but sets the condition that the son must reach 35 years old and use it as his primary residence. In this case, the father’s taxation on the capital gain will not occur until the condition is fulfilled, delaying his tax obligation.
Resolutory Conditions and Self-Assessment Rectification.
Another important concept is the Resolutory Condition, which occurs when the sale is subject to a condition that, if not fulfilled, could cancel the transaction. For instance, a sale in which part of the price is deferred. In these cases, the tax is initially accrued. This means that at the signing of the sale deed, the tax obligation arises. What happens if the condition is later not fulfilled? The taxpayer could rectify his/her tax declaration and request a refund of the taxes paid. As if the capital gain had not occurred in the first place.
Attribution of Gains in Instalment Sales.
In case of real estate sales where the payment is made in instalments, the situation is different. We are talking about sales where a monthly payment is agreed upon over several years, with the property being delivered on the final payment. In these cases, the capital gain is attributed in year where the last payment takes place. This means that even though there are payments done over several years, the accrual of the capital gain happens at the end of the process.
Conclusion.
At White-Baos Lawyers, we specialize in Real Estate Law and in Real Estate Income Taxation. If you are thinking of selling or donating a property, do not hesitate to contact us for expert advice on the taxation of the transaction.
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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