In reviewing the content of other web sites we have been quite surprised to find that the majority are hosting information which is up to five years out of date. An example of this is Capital Gains Tax where we did not find a single site which quoted the correct rate. No doubt this lack of site maintenance has much to do with the Spanish property market having gone flat over the past 12 months or so. However, it seems somewhat irresponsible to publish information upon which people are likely to base their actions simply because the profits of yesterday have thinned out a little. That said, in this section of our web site we look at property and capital gains taxes.

Capital gains tax

Capital Gains Tax (CGT) in Spain for residents is a maximum of 15%, calculated as part of their Spanish income tax. As of January 1st 2007, the European Union caused the reduction of Capital Gains Tax for non-residents from 35% to 18%. If you sell your property now, 3% of the actual value of the property will be retained at the Notary on the day contracts are signed. The remaining amount is deductible with the subsequent year's tax return. Any expenses incurred during the property sale (ie., Notary and solicitor's fees) can be offset against this. Up to 31 dec 1996 residents & non-residents could deduct 11.11% p.a. from their profits after the first two years of ownership and pay no tax at all after 10 years of ownership but this has ended.

Exemptions from Spanish C. G. T.

1. Residents over 65 yrs old selling their principal residence in which they have lived for the past three years are not liable for capital gains tax in Spain.

2. Residents who reinvest all of the proceeds of sale to purchase another principal residence can get capital gains tax relief, provided they have lived in the property for 3 years or more. If they use only a portion of the proceeds from a property sale, they will get a percentage relief up to the amount reinvested. (rollover credit)

For example:

Assume a new house is purchased for 120k, and sold for 180k. This will provide a profit of €60k. If the 180k is reinvested in a new property then there will be no CGT. Assume now a new house is purchased for 90k. This will provide a CGT of 30k (i.e. half of the original profit, because half of the proceeds of the sale have been re-invested).

3. Property bought prior to 31st Dec 1986 is exempt from CGT liability for residents & non-residents, due to old legislation which ended in 1996. Property bought between 1986 and 1996 is partially exempt.

4. Elderly people over 65 who use the "inherit from yourself scheme" in which you sell your house but retain the right to live in it until your death are exempt from CGT. This is a method of raising money where the owners contract to sell the property in exchange for lifetime rights to live in it and receive a monthly payment. Similar systems exist in the UK and are operated by the major insurance companies.

Reductions on capital gains taxes

Most of the allowances on CGT have now disappeared and the only one which now exist are :

Those who have purchased after 1994 can apply an inflation factor to their capital gains tax liability to allow for inflation.

All official expenses in acquiring the property can be used to offset against CGT. - Taxes & fees i.e transfer tax for a resale property or IVA for a new property. Expenses for notary, property registration, the plus valia tax & lawyer fees. You must have the official receipts for these to claim them. Ensure that you obtain all your receipts including one from your lawyer (may be difficult) and put them somewhere safe.

Example of Capital Gains Tax calculation.

Take the price you paid as per the escritura (Title Deed). For example, €90,000.

Add all the official expenses you had in acquiring the property. For example:

Apply the inflation corrector.
Assume the purchase was in 2001 which means that property has inflation factor of approx 1.0404 (accurate figures can be obtained in relation to each sale).

In our example, the original purchase price including expenses is 90,000+10,000 = 100,000. If we multiply this by the inflation factor we get an original purchase price of €104,040 at today’s prices.

In order to calculate your capital gains tax, you must calculate the profit.
Assume you are selling for 150,000 Euros.
Your profit is €150,000 less 104,040 which equals €45,960.

Residents pay Capital Gains Tax on this as part of their income tax (15% is the limit as this is limit of CGT) which equates to €6,894 tax.

As mentioned, up until January of this year, when non residents paid CGT at 35%, the cost would have been €16,086 Now, with the new legislation in force, and Spanish Capital Gains Tax for non-residents levied at 18%, the cost is marginally over €8272 – almost halving the cost.

Annual taxes

If you own a property in Spain you are liable to three separate taxes every year. These are:

Property owners imputed income tax

Wealth Tax

Annual Real Estate Tax

If you are a resident of Spain, the Property owners imputed income tax is not payable on your primary residence. A non-resident must continue to pay the year tax because he is not resident in Spain and cannot claim his property is his primary residence. Residents who own more than one property will attract tax on all but their primary residence. If you are liable for this tax you will have 2 per of the officially rated value of your property attributed to you as if you had earned it. Residents pay this tax by having it added to their annual income tax so the rate they pay will depend upon their income. If you are non resident the tax is always at the flat rate of 25 per cent on any income arising in Spain.

Wealth Tax

Both the resident and non resident are liable for Spanish tax on capital assets. When it comes to property, wealth tax is based on the real sale value declared in the contract. You declare this tax when you file your annual tax return. If you are a non resident you file using Form 714. The tax affects the resident and non resident differently. The resident is taxed on his world-wide assets while the non-resident declares only the property and assets he has in Spain. Tax will be levied on cars, yachts, private airplanes, works of art, jewelry, luxury fur coats or anything else with a value which could be perceived as wealth. The flat pack furniture which came "gratis" with your apartment is not included.

Wealth tax is a very small tax on assets, amounting to only 2/10ths of one per cent up to assets of €167,129. After this amount the tax rate rises in line with the rise in assets. There are deductions available and the principal deduction for a resident of Spain is that he pays nothing on the first €108,182. A husband and wife each have a deduction of €108.182 and each must make an individual declaration. If the asset in question is a principal residence then each person has an exemption of €150,253. If you have a property valued at €300,000 and are married then quite simply there is no tax to pay.

Non residents declare each year on tax form 214 and can declare at any time during the year. Assume a married couple have a property valued at €180,000. 2/10ths of one per cent of this equates to €360 or €180 each. Add to this €600 Euros of Spanish non-resident property owner imputed income tax, divided into €300 each and you get a total of €480 due to the Spanish revenue or €960 from both.

The good news is there is more to pay. Let´s assume you own a villa and the annual real estate tax is €240 euros. This means that your combined taxes just to own a property in Spain are €1200 per annum and you still have your running expenses etc. Being a resident is much more profitable.

Annual Real Estate Tax.

Annual Real Estate Tax known more commonly as property tax varies considerably from town to town for identical properties. It's a municipal tax and as such you would expect to pay far more for an address in Marbella than say one in Albox in Almeria. Inland, away from the coast and living in a little finca could see you with annual real estate tax of around €60. A large villa on a large plot in Puerto Banus could see you with an annual real estate tax of €3000.00. This tax is hiked in line with inflation and rises monotonously every year.

Community Charges

Not done yet, the fees charged annually by your community of property owners to maintain the community are arrived at by adding what it has cost to run the community and then dividing it among its members. As such these are not a tax but a fee but nonetheless should be borne in mind when calculating the annual cost of running your property. For a relatively small apartment the fee could be in the region of €230 per annum but a luxury villa in Marbella or Puerto Banus with security guards could set you back €3500 - 4500.

If you build your own property on your own land, there are of course no community charges.