Four (legal) means of avoiding the tax on capital gains when selling a home in Spain

If a taxpayer sells a residence in Spain, he is obliged to pay the infamous municipal capital gains tax (the municipal plusvalía in Spanish), unless he has lost his transfer. Here we show you some strategies to avoid paying this tax, which depends on making a deliberate loss when selling your home. Property

4 ways to save Spanish capital gains

Update the property value under the CPI

Spanish courts are increasingly allowing people to update their property values to the Consumer Price Index (IPC) so that the house seller can obtain a loss and, hence, avoid paying that tax.

In many cases, after years of ownership, people sell their property. For example, consider a piece of land which was acquired in January 2003 for EUR 150,000 and sold for EUR 180,000 in October 2018. The value of the land has increased according to the values of the acts. If, however, you update the current CPI 2003 value in Spain, the result will be a loss.

"The assumption is very common. In spite of the fact that the comparison of documents results in an increase in the value of the land, the result changes if the acquisition value is updated in line with the consumer price index," points out José María Salcedo, partner of Ático Jurídico Law firm.

Therefore, there are several courts which recognize the possibility of updating the IPC's deed values as it is "not the same as in the year X as in the year X+20 with a certain amount of money."

Include the costs of building the land

Another legal trick some taxpayers can apply is to use expenditure on land development to increase the value of their land acquisition and to obtain a selling loss.

This strategy is set out by a ruling of the Castile and León High Court of Justice in which taxpayers can increase the cost of lands development to the buying value of their homes because it is a plot of land already under way for land development when it was bought.

The Supreme Court is currently pending resolution of this issue. In particular, "the High Court shall decide whether such cost of development involves, or simply increases, the higher buying price of the land, which would be reflected in the transfer price. The costs could not be included in the comparison of deeds to obtain a loss in the latter case," says Salcedo.

Nevertheless, Superior Courts of Justice already consider that the cost of paying for land development means a higher purchase value.

Include notary fees, fees and taxes

A ruling by the Supreme Court of Justice of Castilla y León states that the price may also include notarial charges, registration fees and taxes incurred for the purchase of an estate. In other words, you may add these expenses to the purchase price of the property so that you can lose it deliberately. In both Corporate Tax and Human Revenue Tax (IRPF) in Spain, taxpayers are permitted to add notary, registration and tax to the value of their home purchases to determine the profit derived from the sale.

You can use another trick if there is still a profit on the sale of the house

It is possible that you still profit from the purchase value of the land (if any) and the notary, registration, and tax expenses, after updating the purchase value of the property according to the CPI.

If, however, the profit is very little, especially compared with the tax demanded from the City Council of Ayuntamiento, you can try to get out of the tax by saying that it is unreasonably excessive. "This happens if the profit made in selling the property has either to be used largely to pay the tax," says Jose Maria Salcedo.

Imagine for example a taxpayer having made a profit of €8,000 and paying a capital gain tax of €7,000 or €9,000. Well, the tax is classified as confiscatory in both cases, and therefore inapplicable. In the first case, the payment of the tax absorbs much of the profit achieved. In the second case, the revenue received shall be paid directly by the tax.

"In these cases, the tax will be confiscatory and unconstitutional, even if there is a profit. For example, this was declared by the High Court of Justice of the Community of Valencia," said Salcedo. However, if the profit is much higher than the payable tax, the municipal capital gains tax is no choice but to pay.