The impact of real estate transfers on personal income tax

It’s commonly known that real estate sales are subject to tax. Less widely known is that any property transfer can affect your income tax. To avoid unpleasant surprises months or even years after signing an agreement for conveyance, be sure to get legal advice on the consequences of the transaction.

Any change of ownership of real estate affects your personal income tax. This is clear for selling a house. The difference between what you paid for it and what you get when you sell is normally a gain that, logically, amounts to taxable income. Less obvious is that income tax is due even when there is no capital gain because the change of ownership does not occur via a sale. For example, when the property is transferred as a gift or in the dissolution of a joint ownership arrangement. Yes, that is correct! Even though if there is no capital gain in a transfer of ownership, you still have to pay income tax on it.

It is also not easy to understand why income tax is payable when you sell a house for less than market value or the difference between the purchase and sale price is exclusively owing to inflation. There are even many contradictory court decisions on these questions. Possibly, in the near future, tax rules like these that don’t make much common sense will be found to run against the Spanish Constitution or EU law. As occurred with municipal capital gains taxes. In the meantime, though, we must keep in mind that any change of ownership on our property may be subject to income tax, sometimes for a hefty sum. So we must enter any real estate transaction with our eyes wide open.

Carlos Prieto Cid – Your legal adviser in Spain

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