The Tax Reform and its efect on the Real Estate Market

More and more details on the tax reform to be carried out in January 2015 in Spain are known. One of the sectors that will be affected by the new tax law changes, among other sectors, is the real estate market.

With this information sheet, we would like to offer you a summery and make you confident with the possible changes in the real estate market:

  1. Maintain deduction when purchasing a property: The initial idea which was announced by the government by eliminating the reduction retroactively for people who have acquired a property before January 1st, 2012 seems to finally not take place by reason of unpopularity. Thus, the deduction when purchasing a property will be maintained.
  2. Remove inflation and recession rate: These coefficients exempt from taxation of capital gains the properties acquired prior to 1986, and reduced the quote of the properties which were acquired between 1986 and 1994.
  3. Update of cadastral values: The proposal of updating the cadastral values is not definitively decided yet, but it seems that its approval will go ahead. The rise of the cadastre will increase Property Tax (IBI) and other taxes.The measure would benefit municipalities, especially the small ones, from obtaining financing, but would increase the tax burden on property owners.
  4. Regain the VAT of 4% for new constructions: The current rate of 10% has caused that new constructions of properties have dropped to historic levels. If the VAT rate of 4% is recovered, that would benefit the acquisition of newly built properties and revitalize the construction
  5. Remove the deduction of rentals for tenants: For those tenants whose contracts signed as of January 1st, 2015, the deduction for rentals of properties of 10.05% is removed, homogenizing the tax treatment of the residence between rental and ownership.
  6. Reduction of the tax exemption for landlords: As in the case of tenants, the tax changes do not affect existing leases of today but those which are signed as of January 1st, 2015. The owners whose tenant is older than 30 years, will notice that the income out of the rental of the property will be less as this amount exempt from the yield of the Income Tax is actually reduced from 60% to 50%. If the tenant is under 30 years, revenues are no longer exempt from taxation, as the reduction will be splitted from a 100% to a 50%, removing therefore differentiation by age.
  7. Re-establish the tax relief for property purchase: The idea of this tax reform is to achieve that people start buying properties again and that the great offer of real estates will be absorbed shortly.
  8. In lieu of payment no longer taxed as capital gains: An exemption from the capital gains derived by the delivery of the residence of the bank for “in lieu payment”, with the intent to settle the debt with the asset.
  9. Imputation of the main residence as tax with regards to the Income Tax, nor second residences and subsequent residences: This measure was announced in the first draft which finally will not be approved due to the criticism it has received. So those who bought a property before January 1st, 2013 will continue to enjoy a corresponding deduction, not imputed as income. The second and subsequent homes will also not notice an increase of tax burden.

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