Taxes on the capital gains of a property sale
By Armin Gutschick & Anja Sämann-Gutschick
Many owners in Ibiza bought their property years ago, for a price declared on the deeds that was well below present market prices. As a consequence, the capital gains tax they will have to pay when they sell the property will be quite high. However, anyone who bought their property before 1994 will be able to benefit from a reduction on said tax.
Firstly, let’s talk about some relevant data regarding taxes in relation to the sale of properties in Ibiza: the tax base from which the state capital gains tax is calculated is the difference between the price at which the property was bought and the price for which it was sold. The purchase value is derived from the latest notary deed, which could be for a sale, an inheritance or a donation, or as part of formalizing the acquisition of actions in a company. The purchase value is understood as the price that was paid for the property, plus the expenses and taxes related to the purchase.
The most common taxes are the Purchase Tax (Transmisiones Patrimoniales or ITP) and the Inheritance Tax (Sucesiones); whereas expenses are the fees of any lawyers and notaries, as well as the registry fees. Often, the ITP is referred to as the “tax on the purchase of properties“, which is not quite correct as it is also applicable to mobile assets, such as cars, for example.
In principle, you can also deduct any investments that add value to the property, such as building an extra bedroom or bathrooms within the applicable laws and with a renovation licence. Investments that are made to increase the comfort of the property (such as changing wooden windows for PVC ones) are not recognised by the taxing Authorities as improvements that can be deducted.The sale value is the price at which the property was sold, minus the taxes and expenses incurred by the seller.
These are basically the municipal capital gains, the fees of the lawyers and any commissions charged by the estate agents.
Until 2006, there was a valuation scale by which the benefit obtained was reduced according to the years that had gone by between the purchase and the sale, discounting 11% per year after the third year. This tax benefit was applicable until 2006 to all properties that had been acquired before 1994, and established a limit at 400,000 €.
As an example, we will explain here a practical case: a non-resident owner sells his home in Ibiza in September 2019 for 170,000 €. He bought it in January 1985 for a little less than 6,000 € and renovated it 20 years ago, but does not have the invoices to show for it. For the period of January 1985 to January 2006 (21 years later), the capital gains tax will be reduced considerably. For the period going from 2006 to September 2019 (13 years), the profit will be taxed at 19%.
The result for this example would be the following: the purchase value is 170,000 €, from which we can deduct the 6,000 € he paid for it. Therefore, the tax base will be 164,000 €. Since between 1985 and 2006 the reduction rule applies, the tax for that period will be of only 12,000 €. In comparison with the 19% interest rate (which would give a result of 31,000 €), this results in an important benefit – a not insignificant sum of 19,000 €.
As this example goes to show, before putting a property up for sale, it is sensible for owners to get advice from an expert in order to find out how much the property gains tax is likely to be in their particular case.