4 scenarios that prevent applying the exemption for buying a main residence

The exemption for reinvestment in a primary residence is a tax benefit widely used by taxpayers in Personal Income Tax (IRPF). This benefit allows taxpayers to declare the capital gain obtained on the sale of a main residence as exempt, provided that the amount is reinvested in buying another home.

However, some situations can generate problems with the Spanish Inland Revenue and make it impossible for taxpayers to apply this exemption. José María Salcedo, managing partner of Salcedo Tax Litigation, explains four of these situations:

Informally inhabited property

When a taxpayer lives in a home for more than three years without a deed to prove ownership or possession, the Inland Revenue does not consider it effective. This means that the reinvestment exemption cannot be applied in this case, as the requirement of living in the property in full ownership is not met.

Therefore, from the calculation of the three years of residence in the property, the period in which the property was inhabited without a deed must be excluded. In other words, they are not considered the owner.

Transfer of a property of which one is the only bare owner

If a taxpayer transfers a property of which they are only the bare owner (i.e. they don't have full ownership), they will not be able to apply the exemption for reinvestment in the main residence. In the recent ruling of 12-12-2022 (appeal 7219/2020), the Supreme Court set that the exemption requires the taxpayer to have had full ownership of the property for at least three continuous years, and bare ownership is not sufficient to meet this requirement.

"It will be of little use for the taxpayer to prove that they have lived in the property for over three years. The Supreme Court's view is that the problem is the lack of sufficient ownership for the property to be considered the main residence. Thus, it is not enough to be the bare owner; one must have full ownership of the property," says Salcedo.

Property occupied for more than three years as a tenant

If a taxpayer lived in a property as a tenant before buying it, the time they occupied the property as a tenant is not counted as part of the minimum three-year period of actual residence in the property. This means you will not be able to apply the reinvestment exemption if you did not fully own the property during the three years you lived there.

"As the Supreme Court has repeatedly stated, the property must be occupied for three years in full ownership. And this clearly does not apply to the tenant, even if they are renting-to-buy," says Salcedo Tax Litigation's managing partner.

Property inhabited for less than three years due to civil partnership separation

Furthermore, for civil partnership separations, where the couple share a home, the tax office does not automatically consider the home permanent, and the exemption may not apply. However, if the owner can prove that the separation made it impossible to continue living in the property as a main residence, the exemption could be maintained. The Directorate General for Taxation has recently stated this.

Exceptions to the three-year time limit for considering the property to be a main residence

It is important to remember that Article 41bis, section 1 of the Personal Income Tax Regulations allows for exceptions to the requirement of three years of effective residence in the main residence in cases of death of the taxpayer or similar situations, such as marriage, separation, transfer of employment or getting one's first job. In these circumstances, the home is considered the main residence despite the owner not living there for a full three years, as José María Salcedo has stated.