Exemption for reinvestment in the current home
Reinvestment in the main residence is an exemption provided for in Spanish legislation that makes it possible for the capital gain obtained from the transfer of the main residence not to be taxed, i.e. not to pay tax on the profit generated by the sale.
And what is the benefit?
It is the positive difference between the sale price and the price or value of the purchase made by the seller of the property that was his habitual residence.
In order to be able to apply the exemption, the following requirements must be met:
- Reinvest all or part of the net amount obtained from the sale in the purchase of a new main residence or in the refurbishment of the property that is to be your new main residence.
- That the reinvestment is made within the two years prior to or following the date of transfer of your main residence.
- That both the property you are transferring and the property you are acquiring are considered your main residence.
- That the new home acquired is effectively and permanently inhabited by the taxpayer within a maximum period of 1 year from the date of acquisition or completion of the works.
What is considered to be a principal residence?
It is vitally important to know what is considered to be a principal residence, since, as we have already said, if the property transferred or the property acquired or refurbished does not acquire such status, the exemption is not applicable.
According to the IRPF regulations, the habitual residence is considered to be that building which constitutes the taxpayer’s residence for a continuous period of at least three years. In this sense, for the purposes of the exemption, any building that has acquired that status on any day of the two years prior to the date of transfer may be considered a habitual residence. For example, if in 2020 you have a flat that is your main residence, in 2021 you move out and lose that status, and in 2022 you sell it; this sale can be considered as a sale of your main residence.
How is the exemption applied?
This tax privilege is not automatic. If you want to apply it, you need to report it in the tax return for the tax year in which you allocate the sale of your main residence. It is possible that, at that time, you have not yet reinvested the proceeds from the sale of the property in a new primary residence. Don’t worry, you can still benefit from the exemption; you just need to declare your intention to reinvest and the amount you intend to reinvest in the tax return for the year in which you make the sale.
What happens if I apply for the exemption and then do not reinvest or do not meet the requirements?
Su obligación será realizar una declaración de renta complementaria del ejercicio en que declaró la reinversión o la intención de reinvertir. Deberá incluir en la base imponible del ahorro la ganancia patrimonial por la que no pagó impuestos adicionada con los intereses de demora. Esta declaración la tendrá que presentar antes de que finalice el plazo para presentar la renta del ejercicio en el que se hayan incumplido los requisitos. Si no lo hace, seguramente será objeto de una revisión por parte de hacienda y ser sancionado.
EXAMPLE OF FULL REINVESTMENT AND PARTIAL REINVESTMENT
To make everything a little clearer, let’s look at a practical example:
Let’s imagine that in the year 2000 a taxpayer bought his main residence for an amount of 100,000 euros, of which 80,000 euros were financed by a mortgage loan granted by a credit institution. In addition, he paid €10,000 in Transfer Tax (TPO) and €500 for notary and registry fees.
Total cost of the purchase €110,500.
In 2022, the taxpayer decides to sell his home to buy a new one and manages to sell it for 250,000 euros, leaving 15,000 euros pending repayment of the mortgage loan that he was granted; he also pays 2,000 euros of Capital Gains Tax (Capital Gains Tax). Total cost of the purchase €248,000, of which €15,000 is used to amortise the outstanding mortgage loan on the property sold; he therefore obtains a net of €233,000.
The taxpayer decides to reinvest all the proceeds from the sale in the main residence. The calculation of the amount that would be exempt would be as follows.
First, the capital gain obtained from the sale would be calculated according to the IRPF regulations, i.e. the transfer value of the property minus the value of its acquisition.
| CONCEPT | ACQUISITION | TRANSFER |
| Price | 100.000 € | 250.000 € |
| Expenses and taxes | 10.500 € | 2.000 € |
| Total value | 110.500 € | 248.000 € |
| GAIN ON SALE | 137.500 € |
Once calculated, we see that in order for the gain of €137,500 to be exempt from tax, the taxpayer must reinvest €233,000 in the new main residence.
| CONCEPT | VALUE |
| Valor transmisión | 248.000 € |
| Amortización préstamo hipotecarios pendiente de pago | 15.000 € |
| IMPORTE POR REINVERTIR | 233.000 € |
Now let us imagine that, instead of reinvesting the whole amount, the taxpayer only reinvests part of it, namely €150,000. In that case, it would be a partial reinvestment and the amount of the gain obtained corresponding proportionally to the amount reinvested would be exempt. It would be as simple as making a rule of three:
EXEMPT PROFIT = PROFIT ON SALE x (AMOUNT REINVESTED / AMOUNT TO BE REINVESTED)
Or what is the same:
EXEMPT PROFIT = 137.500 € x (150.000 €/233.000 €) = 88.519,31 €.
In conclusion, the taxpayer would be taxed on a capital gain of €48,980.69 and €88,519.31 would be exempt. The reinvestment exemption for reinvestment in the main residence is a very technical exemption that requires good tax advice as there are many variables to take into account, such as the percentage of ownership of the property or the fulfilment of requirements that are sometimes complicated to determine.
If you have any doubts regarding this issue, please do not hesitate to contact us, by telephone to Carles Monfort Codina or by e-mail to cmc@btsasociados.com, we will be delighted to help you.