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Binding Consultation on Personal Income Tax

The Spanish State through the Tax Office recurrently publishes binding consultations to help taxpayers understand legal regulations.

These consultations are therefore a procedure that allows taxpayers to obtain a binding resolution on how a specific regulation should be interpreted in its application to a specific case.

Binding Consultation V0705-22

In this article we are going to analyse the binding consultation V0705-22 on Personal Income Tax published on 1st April 2022. It answers the query of a taxpayer who intends to benefit from the exemption consisting in the non-payment of capital gains tax gains on the sale of the main residence for reinvestment in another main residence.

The particularity of this case is that the main residence that the taxpayer wants to acquire is a home under construction, having signed a private purchase contract on 1st March 2021 and paid an advance payment of 188,320 euros to the developer. The new home will be delivered to him on 1st August 2023.

The taxpayer sold his first habitual residence for the purchase of this new one on 11th December 2020.

Thus, Article 41 of the Personal Income Tax Law states that:

“Exemption may be granted for capital gains arising on the transfer of the taxpayer’s main residence when the total amount obtained is reinvested in the purchase of a new main residence”.

Series of circumstances

For this provision to be applicable, a series of circumstances must be met, which are listed below:

  1. The total amount obtained from the sale must be reinvested in its entirety in the purchase of another main residence. If the reinvestment is only of a part of the amount obtained, the taxpayer will be exempt only of the amount reinvested.
  2. Both dwellings must be habitual dwellings, i.e. the property must be the taxpayer’s habitual dwelling for a continuous period of 3 years (with some exceptions). Likewise, the property being sold must have been the taxpayer’s habitual residence at the time of the transfer or until any day within the two years prior to the date of sale.
  3. If in the purchase of the first habitual residence the taxpayer benefited from a mortgage, the gain that will benefit from the exemption will be which is obtained by reducing the transfer value by the principal amount of the loan pending payment.
  4. The reinvestment of the money in the purchase of the second main residence must take place at once or successively, but within a period not exceeding two years from the sale of the main residence. For example: in the proposed case where the taxpayer sells his main residence in December 2020, he would have to reinvest the gain in the purchase of another main residence before December 2022, otherwise he would not be exempt from paying the capital gain.

However, this specific case is particular given that the taxpayer wishes to reinvest in a home under construction which will not be delivered until August 2023, at which time the deed of sale will be formalised with the payment of the outstanding balance of the price.

In these cases, the Spanish Supreme Court has considered that in order for the exemption of the capital gain obtained on reinvestment in future construction to apply, the construction must be completed within a period of no more than 4 years from the start of the investment.

For example: a taxpayer who sells his first main residence in December 2020 will have a period of 2 years from that date to make the first investment in the purchase of the new main residence. If this is fulfilled, a new period of 4 years from the investment in the purchase of the second main residence is opened for the completion of the work and delivery of the property. Only in this case will the taxpayer who reinvests in the purchase of a primary residence under construction be able to benefit from the exemption on the capital gain.

Therefore, returning to the case raised by the taxpayer, the Tax Office decides that he would benefit from the tax exemption as within two years of the sale of his first habitual residence (December 2020) he reinvested the amount of 188,320 euros for the purchase of another habitual residence under construction; specifically, the taxpayer paid this advance to the developer in March 2021.
Likewise, before 4 years have elapsed since the investment of 188,320 euros, the property will be handed over, specifically in August 2023, thus fulfilling the taxpayer’s requirements to apply this tax exemption.

If you are thinking of acquiring a property under construction, do not hesitate to contact us, we are specialists in real estate law.

If you are interested in purchasing a property in a new development which is under construction in or around Marbella, do not hesitate to contact us. Our firm specialises in the real estate field, and we will guide you through the whole purchasing process ensuring the purchase is 100% safe.



Gemma Fuentes Romero