When can you get out of paying your IRPF Income Tax for selling your house?

Almost all transactions are taxed and it’s very difficult to escape tax control. However, there are occasions when you can be exempt from paying certain taxes. In the case of selling a home, the capital gains obtained may be exempt when the money is reinvested in the purchase of another habitual residence or in its restoration. That said, almost no one today is exempt from the payment of municipal capital gains, unless they sold the property at a loss.

Specifically, when a person sells his or her main residence, this profit does not have to be declared in the Spanish Personal Income Tax (Impuesto sobre la Renta de las Personas Físicas or IRPF) if they’ve reinvested the amount obtained in the purchase of another main residence or in the refurbishment of the house that will be their home. In this way, taxes ranging from 19% to 23% of the profit are saved.

The profits obtained must be included in the taxable base of the savings and will be taxed at a fixed rate of 19% up to 6,000 euro, 21% from 6,000 to 50,000 euro, and 23% from 50,000 euro onwards.

If the taxpayer has signed a mortgage to buy a new house, then the total amount obtained in the transfer will be considered to be the value of the sale minus the principal of the outstanding loan.

Another group of taxpayers who are exempt from IRPF income tax on the sale of their home are those over 65 years of age. If you are above this age and you sold a property last year, you may qualify for some tax benefits depending on the type of property and the percentage of ownership you have. If it’s a regular home, the exemption is 100% and if the ownership is shared, the exemption will only apply to the owner over 65 years of age for the part of the home that belongs to him/her.

If the home sold is not the main residence but a second home, retirees may not be taxed on the profit as long as it is reinvested in an annuity such as life insurance, with the maximum amount that can be used for this being 240,000 euro.

Also exempt from paying Personal Income Tax are people in a situation of severe or great dependency in accordance with the Law on the Promotion of Personal Autonomy and Care for Persons in a Situation of Dependency.

What happens if you want to buy a new home?

The Central Economic-Administrative Tribunal (Tribunal Económico-Administrativo Central or TEAC) has set a two-year deadline for the completion of the works and the acquisition of the new property, that is, two years after the transfer of the house or two years before the sale. In the latter case, in order for the sale to be exempt from taxation, a mortgage on the property would have to be applied for and subsequently cancelled after the sale of the old property within the established two-year period.

The taxman’s tricks to force people to pay their personal income tax

The law firm Ático Jurídico points out that the Spanish tax authority, the Hacienda, usually analyses the taxpayers who have applied the reinvestment exemption with a magnifying glass, so it’s important to be very attentive to the different problems that may arise:

1. Forgetting to mention in your tax returns that the amount obtained from the sale of the property has been reinvested: In this case, the Treasury considers the exemption for reinvestment to be a tax option. Therefore, if in declaring the profit obtained there is no mention that the amount has been reinvested, the Treasury will consider that the taxpayer has chosen not to apply the exemption. This option can no longer be modified once the tax declaration deadline expires on 2nd July 2018 for 2017 Income Tax.
2. Not reinvesting the exact amount obtained from the sale: As the law requires that the reinvestment must be of the same amount obtained from the sale, the Treasury considers that if this is not the case (for example, if a new home were purchased before the sale of the old one), the exemption would not apply.
3. How long does the Hacienda have to perform its checks? Finally, the Spanish Revenue & Customs considers that the statute of limitations in these cases is counted from 2 years after the sale of the previous main residence (maximum period for reinvestment). This stands even if the taxpayer does not exhaust this term and has bought the new home much earlier. There are other judicial rulings, however, for example by the Supreme Court of Justice of Madrid, which consider that the limitation period begins when the taxpayer, once the previous home has been sold, buys a new one.

What if you sold the house at a loss?

If you have lost money on the sale of a home, you should not be taxed for this negative return, but you should include it in your income tax return. In addition, the losses may be offset against capital gains realised in the course of the financial year from funds, shares or other property. The result is a reduction in the tax bill.

However, if the result is still negative, then it will be offset against the positive balance of the investment income included in the taxable income for the year, up to a limit of 20% of that balance.

If even after this compensation there is still a negative balance, it shall be offset in the following four years in the same order as indicated above.

There’s still the municipal capital gains tax to be paid

Any person who sells their home for a profit will have to pay this municipal tax. At present, there are parliamentary procedures happening for modification of the tax. The maximum ratios that can then be applied by the municipalities will also be changed but for now it remains the same.

Nonetheless, the Supreme Court has 55 cassation appeals against the municipal capital gains tax on the table and 44 of them focus on the same concern that taxpayers have: whether it is possible to annul the liquidations of this tax when a property has been sold and money has been earned in the operation.

The basis used is that the articles declared unconstitutional by the Constitutional Court and expelled from the system cannot be applied in any case, not even if there is an increase in value.