Four (legal) ways to avoid paying capital gains tax when selling a home in Spain

When a taxpayer sells a home in Spain, they are obliged to pay the infamous municipal capital gains tax (called the plusvalía municipal in Spanish) unless they have incurred losses from the transfer. Here we show you some strategies to avoid paying this tax, which rely on deliberately ensuring that you make a loss on the sale of your home.

4 ways to get out of paying capital gains in Spain

1. Update the value of the property according to the CPI
   
   More and more Spanish courts are allowing people to update their property values on the Consumer Price Index (Índice de Precios al Consumidor or IPC) so that the seller of a house could feasibly obtain a loss and, therefore, avoid paying this tax.
   
   In many cases, people sell their property after many years of ownership. For example, think of a piece of land acquired in January 2003 for 150,000 euro and sold in October 2018 for 180,000 euro. According to the values of the deeds, the land value has increased. However, if you update the 2003 value according to the current CPI in Spain, the result is a loss.
   
   "This is a very common assumption. There are an infinite number of transfers in which, despite the fact that the comparison of deeds results in an increase in the value of the land, the result changes if the acquisition value is updated in accordance with the Consumer Price Index", points out José María Salcedo, partner of the law firm Ático Jurídico.
   
   Therefore, there are several courts that are recognizing the possibility of updating the deed values with the IPC because “it is not the same what can be bought with a certain amount of money in the year X as in the year X+20".
    
2. Include the costs of making the land buildable
   
   Another legal trick that some taxpayers may apply is to use land development expenses to increase the acquisition value of the land and thus obtain a loss on the sale.
   
   This strategy is established by a ruling of the High Court of Justice of Castilla y León, which holds that taxpayers can add the costs of land development to the purchase value of the home, because it is a plot of land that, when it was bought, was already on course for land development.
   
   This issue is currently pending resolution by the Supreme Court. Specifically, "the High Court must decide whether these development costs involve a higher purchase price of the land, or simply increase the value of these, an increase that would be reflected in the transfer price. In the latter case these expenses could not be included in the comparison of deeds to obtain a loss," says Salcedo.
   
   Nonetheless, there are already Superior Courts of Justice that are considering that the expenses of paying to develop the land into buildable land means a greater purchase value.
    
3. Include notary fees, registration fees and taxes
   
   A ruling by the Castilla y León Supreme Court of Justice states that notary fees, registration fees and taxes incurred when buying the property may also be included in the price. In other words, these expenses can be added to the acquisition price of the property and so you can deliberately make a loss when selling it. In both Corporate Tax and Personal Income Tax (IRPF in Spain), taxpayers are allowed to add notary costs, registration costs and taxes to the purchase value of the home in order to determine the gain obtained from the sale.
    
4. One more trick you can use if there is still a profit on the sale of the house
   
   It is possible that, after updating the purchase value of the property according to the CPI, adding the cost of land development (if there are any) and notary, registration and tax expenses, you still make a profit in the sale of the property.
   
   If the profit is very small, though, especially in comparison with the tax that is demanded from the Ayuntamiento City Council, you can try to get out of paying the tax by arguing that it is unreasonably excessive. "This happens when the profit obtained in the sale of the property has to be used either largely entirely to pay the tax," says Jose Maria Salcedo.
   
   Imagine, for example, a taxpayer who has made a profit of 8,000 euro and has to pay a municipal capital gains tax of 7,000 euro, or 9,000 euro. Well, in both cases, the tax will be classified as confiscatory and thus inapplicable. In the first case, the payment of the tax will absorb a large part of the profit made. In the second case, the income obtained will go directly to the payment of the tax.
   
   "In these cases, despite there being a profit, the tax will be confiscatory and unconstitutional. This has been declared, for example, by the High Court of Justice of the Valencian Community," says Salcedo. However, if the profit is much higher than the tax to be paid, there will be no other choice but to pay the municipal capital gains tax.