Tag Archives: real estate

Holiday homes: Practical problems through urban bureaucracy

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Everyone agrees that one of the main problems of Spain is the bureaucracy. In 2012 we reported expectantly on the regulation of the market of holiday rentals in Catalonia (https://blog.tarracoiuris.com/en/?p=66) but we were already afraid of the risks caused by the proposed intervention of the municipalities.

Unfortunately, our worst predictions have now come true, as expected. Bored officials of municipalities have begun to abuse their statutorily granted powers of control, not only to charge fees that increase the cost of renting holiday villas and appartments, but also and even worse to block rentals with unnecessary  requirements which have nothing to do with the legally foreseen inspections.

According to the Decree 159/2012 of 20 November on vacation rentals and holiday homes, the holiday home rental of individuals should be encouraged through quality controls. The communities were empowered to establish a register of these accommodations and the only formal and statutory requirement to register a property in such a register was, logically, to certify its habitability in the moment when the owner wanted to offer the apartment or the house for renting.

The city officials have tried to exploit the information obtained from these communications relating to the rental activity, to examine the urban situation of the holiday homes, and now begin to threaten with penalties for possible violations of urban development. Although these violations probably existed for years without the officers had endeavored to do something about it and they have nothing to do with the activities of tourists, which the law was intended to normalize. Once again, the behavior of officials is actually stimulating the shadow economy, as has always happened in this country: they are active only when the work is easy because all the information is already on their table, but are unlikely to pursue infringement on their own initiative.

Carlos Prieto Cid – Lawyer

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The difference between purchase price and fiscal value when buying or selling real estate

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Anyone who wants to invest in property in Spain could imagine that the price at which he acquires the property must coincide with the value declared in the official document the acquisition is drawn up with. However, throughout history, we have been faced with a variety of situations, depending on the economic environment and the changing behavior of the tax authorities.

Those who bought property before the explosion of the housing bubble in 2008 have surely heard at some point in the process of acquisition a proposal about the possibility to declare in the official title deed of sale (in the „Escritura“) a value for the property lower than the price actually paid for it. This practice was very common in order to reduce the tax for both seller and buyer: the buyer pays less for the property transfer tax (Impuesto de Transmisiones Patrimoniales), he has to pay as the purchaser, as the basis for calculating this tax is the declared price of the transmission; the seller also pays less, since the gain on the sale becomes less, and the lower the profit, the lower the income tax (Impuesto de la Renta de las Personas Físicas), he has to pay as the transferor.

Today, times have changed and, surprisingly, we find ourselves in the reverse situation. The current catastrophic situation of the property market may lead to buyers and sellers to specify a higher value than the value actually paid in order to avoid undesirable inspections by state tax authorities. Regardless of the price we pay for real estate, the reference value for the State Tax Agency is a fixed a priori value, the so-called “taxable value”. This value can be calculated for each case, based on the value assigned by the Cadastre, depending on numerous objective factors. In the Golden Years prior to 2008, some municipalities have updated the cadastral value of the property in its territory, raising it under the spectacular rise in prices in the housing market. Once the cadastral values of a community are changed, a new modification is not so simple, and, in addition, legal deadlines must be respected, which can delay the update for many years. For this reason, now we meet occasionally with cadastral values updated before the bubble burst in the housing market, and therefore, the minimum taxable values obtained from them are higher than the average market price.

If these taxable values are not considered at the moment of the formalization of the purchase contract in a public document with tax transcendence, the risk to face a tax audit is very high and it will be difficult to prove that in fact we did not have to pay more for the property which we have acquired, although the price we have indicated in the title deed was really the one we paid for.

Carlos Prieto Cid – Lawyer

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Acquisition of property by non-residents: important issues that must be considered

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We take a lot of risks when deciding to buy a property in Spain. If
the seller is a non-resident owner, there are specific risks that are usually not taken into account by investors.

A big part of the real estate on the Spanish coast belongs to owners who do not reside in our country and it is usually a house or apartment for holiday. If we buy this real estate to owners who are not residents, we must not forget the need to
be cautious to avoid later unexpected problems with the administrations.

The most common risk is the obligation to pay the council tax on the increase in value of urban land (the so-called “plusvalía municipal”). The law provides that this tax should be paid by the seller, and so, the buyer does not usually care about this expense when calculating the total cost of the investment transaction. However, when the seller is not a resident, the law obliges to pay this council tax to the buyer as a substitute of the seller, the one who should be actually required to pay it. This exception to the rule has its own logic, as it tries to avoid that the administration has to prosecute abroad the non-resident sellers who did not pay their taxes voluntarily, because when they sell their property in Spain, they very often do not retain any other property in the country, and, therefore, they are technically insolvent. In this case, the municipality requires the payment of the tax to the party who is closer and this is the buyer.

That is why during the registration of the purchase contract we should require the seller the corresponding provision of funds (or withhold the foreseen amount of the tax from the money that is still owed ​​to the seller for the property). If this exception to the general rule is not considered and no precautions are taken, in the case that the municipality requests that we as buyers pay the tax on the increase in land value because the seller did not pay this tax freely, we will have no choice but to undertake this payment, because, before the Spanish administration, we would be the only one who is obliged to pay. Another thing is that we can claim ourselves afterwards from the seller what we have paid to the municipality, through a civil action against him.

Carlos Prieto Cid – Lawyer

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Planning your succession by setting up a company

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One of the most important legal topics for owners of apartments or houses in Spain is how to transfer this property to their heirs with minimal tax and handling cost. An interesting option is to set up a trading company (or other type of legal entity) and transfer the property to it

The following pattern is very often repeated in many families, who spend their holidays every year in Spain: a couple buys a property by the sea to come here every summer with their children; the children grow up, create their own family and continue spending the holidays with their own children in the house of the parents. The grandparents, often pensioners, keep the property in stand and handle all related processes, while the children spend with the grandchildren their holidays there. This situation persists without any problems until the moment where the grandparents can no longer take care of the property for reasons of age. From this point on, and especially after the death of grandparents, the new co-owners have to face, if no precautions have been taken, apart from the usual problems of handling an inheritance, the problems of the management of the property, which is alternately used by the heirs. In addition, the summer residence of the family is often not used exclusively, and the time periods in which the family does not use it personally, is rentes to tourists, thus creating rental income from property.

One way to simplify the procedure of inheritance and, above all, to allow easy control of the house and the income it can generate, is to create a commercial company, which eventually becomes the owner of the property. It would be ideal to set up the company before the acquisition of the property takes place. In this case, the company would already would be the owner of the property from the beginning and the cost of the transfer of the property from the previous owners (the grandparents in the above example) to the company does not arise. But even if this is not the case, the tax costs of this transfer are lower than that of the transfer to the children through inheritance or gift. Shareholders of the company may change over time (you can include other children and even their spouses) without change of ownership, which would imply costs and taxes on the transfer of property.

Carlos Prieto Cid – Lawyer

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Under the new Entrepreneurs’ Law, a residence permit can be obtained by purchasing a property in Spain

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In enabling this, the Spanish government is attempting to reinvigorate the property market by attracting foreigners from outside the European Union with the granting of a residence permit for investing in Spain, which brings the added benefit of being able to move virtually freely around various member states under the Schengen Agreement.  

Here, too, there is a danger that an investor will view the purchase of a property as an opportunity to do business in Europe.  This can mean that they fail to check sufficiently thoroughly as to whether the purchase of the property is safe and reputable, as they want to take advantage of the opportunity to gain legal residency in Spain.  The risk is the same as for the tourist who wants to enjoy their holiday rather than attending meetings with lawyers.  In this case, too, the investment is a means, not an end, for just as the tourist sees the acquisition of a property as a means that secures them their holiday in Spain, the entrepreneur sees their opportunity to obtain a residence permit by purchasing a property, which then enables them to move freely around the Schengen area.  Both view getting adequate protection for their purchase as unnecessary.  If any problems subsequently arise, they find themselves compelled to find a lawyer to solve the problems arising from their failure to seek independent, professional advice.  However, by then it is often too late, and if there is a solution, it will involve much higher costs than if they had sought advice at the right time.  Well-advised investors can avoid making such mistakes.

Carlos Prieto Cid – Lawyer

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Purchasing property in Spain as an investor, not as a tourist

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Each year, many of the millions of tourists who spend their holiday in Spain decide to buy a property in their destination country.  However, when investing their savings in Spain, they often act whilst still in a holiday mood, and make major decisions without due care and attention.

In almost any language, the term ‘tourist’ leaves a slight aftertaste in the mouth.  Airlines offer their cheapest tickets under the heading ‘tourist class’, while in every country that survives on tourism – and Spain is no exception – tourists are seen as easy prey who are only in town for a short period of time and can easily be taken for a ride.  This image of the typical tourist, whom it is easy to hoodwink and escape unpunished, is largely down to their poor language skills and lack of knowledge of the local customs, but also because tourists are on holiday, of course, and want to enjoy their short time away from home and are therefore relaxed and less vigilant.  As a result, they do not act with the same amount of care as they might in a similar situation at home.

Purchasing a property always involves a large outlay.  In many cases, sums are invested which represent many years of saving.  Such a decision should be given the appropriate degree of protection and made with as much information as possible on the potential legal and financial risks.  Sadly, as lawyers, every day we see how foreigners are conned when purchasing a property and lose their money as a result of failing to seek advice.  Often, people think they don’t need any advice, but then comes a rude awakening.  The cost of an independent consultation is minimal compared to the often hidden dangers when signing a contract of sale for a property; and such advice can only be independent if it has no connection with any other professionals involved in the sales contract.

Carlos Prieto Cid – Lawyer

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New campaign of the Tax Agency to demand the payment of income tax to non-residents

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Even if they are fiscally non-resident, owners of real estate in Spain must file a separate income tax return each year and pay the so-called income tax for non-residents (IRNR) for revenues earned from the property .

The Spanish state tax authorities have not been very demanding until now regarding the payment of income tax to fiscally non-resident property owners. Many homeowners are not aware of the existence of this tax liability and can not understand why they have to file a tax return and pay this tax in Spain, despite the fact that they are not getting any income. They come to Spain just to spend their holidays: they do not work, they do not receive interest income from cash deposits in the bank, they do not rent their property. However, the mere possession of a property in Spain, as in other European countries, is considered by the law as income, even if the property is not rented. State tax rules require that the owner gets benefit of his own real estate anyway, even though these objects are not leased. The only exceptions are the cases in which the property is one’s own domicile or if the property is devoted to economic activity. Both cases can never happen with non-residents.

There is another tax, the municipal tax on property ownership, the so-called IBI (Spanish Impuesto Sobre Bienes Inmuebles), the payment of which the local municipality requires to property owners each year, and which is calculated and declared by the administration itself. In contrast, in the case of the state income tax for non-residents – IRNR-, the tax inspection is not mandated to prepare tax returns for the non-residents, but it is the taxpayer himself who is required to provide an annual tax return, and calculate and pay the property taxes on its own initiative.

This month, many homeowners who spend their holidays in their own apartments or private homes in Spain, received a letter from the Spanish tax authorities, reminding of the existence of the tax on the income of non-residents and the obligationy of paying it. Earlier, the state tax agency was very generous regarding this tax. Now, however, given that the economic situation is so bad, it appears that IRS has become stricter, requiring submission of tax returns and payment of this tax by all non-residents who own property in Spain.

Carlos Prieto Cid – Lawyer

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Building Energy Efficiency Certificate: a new requirement for the sale of real estate

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The Spanish Royal Decree 235/2013, of 5 April, has just come into force. It approves the basic procedure for the certification of energy efficiency of buildings. Under this new regulation, from June 1st 2013 on, you cannot validly formalize contracts for the sale or lease of property without the submission of such certification.

Real estate selling management has become a very difficult task in the last years, but not only because of the crisis: the continued imposition of new legal requirements has also hindered this sale management, with the excuse to increase the guarantees for the buyer. For example: recently, we have found that it has become impossible to record a property purchase contract in the Registry of Deeds if the transfer of ownership has not been previously communicated to the municipality concerned, so that the tax popularly known as “plusvalia” could be calculated and paid. Previously we had also found that, in the case of sale of dwelling, it has become necessary to prove its habitability by filing a document that, in many cases, costs a lot to get (or at least, a long time). And in most cases, in which such statements only come to ratify the existing factual situation, its demand has only served to slow processes and increase the costs and the bureaucracy around the sale of a property, which are already excessive.

The last obstacle to be overcome by sellers of property is the obligation to provide buyers or tenants the BEEC energy certificate confirming the energy efficiency of the house. This document will describe how the house effectively consumes electricity and will include objective information on the minimum energy requirements so that future owners or tenants of the building (or a part of it) have the opportunity to compare and evaluate its performance with other similar proposals.

The purpose of this regulation, allowing consumers to compare the energy efficiency of buildings, is to promote energy saving investments and also more energy efficient buildings in the housing market. In addition, this guideline helps to report information about carbon dioxide (CO2) emissions from the residential sector, which will facilitate the adoption of measures to reduce emissions and improve the energy rating of buildings. Laudable goal, of course, but in a very long term, if there is something new to be built in this country. Nowadays, what we have is a huge offer of buildings that do not find a buyer and selling them has become with the new directive even more difficult.

Carlos Prieto Cid – Lawyer

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The risk in buying inherited real estate

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Buying real estate is always an important decision because it involves a significant investment. Thus, you should always think about the consequences and know exactly what you risk in your case.

Each case has its own set of problems. Today I want to consider a very specific situation: the children or the surviving spouse inherit a house or an apartment, where the deceased person had his or her permanent residence. During the signing of the necessary notary documents, to reduce the high Spanish inheritance tax, heirs are happy to listen to the proposal for including a declaration in the document of acceptance of the inheritance saying that they have no intention of selling the property in the next five years: this way, it will save quite a large sum for payment of the tax or even pay nothing, and the instrument of acceptance of the inheritance may also be registered in the land registry without problems.

As time passes, the heirs forget that at the time of the acceptance of the inheritance they have signed this declaration to take profit of this exemption from the tax, which was notarized, and then someone appears offering  a very reasonable price for the property (it has happened often so in the golden days, long before the crisis began). Then the heirs decide to sell, and therefore the buyer acquires the property and agrees to pay a high price. It can even be possible that a bank finances the operation with the warranty that the property the buyer is going to acquire is theoretically free from encumbrances. But this is not quite true: there are responsibilities in respect of the property, which are recorded in the register of deeds but of which very often no one thinks (nor the buyer who acquires, nor the notary who certifies the transaction, neither the bank who risks his money): State tax authorities have the right to review the tax declarations filed in each transfer of ownership, and if they do not agree with the calculation and the amount paid at the time of the acquirement, they can unilaterally make a new calculation of the tax, having the warranty, that the property is encumbered in any case to cover potential liabilities to tax authorities, regardless of who nowadays the owner is.

This would mean in our example that the tax authorities could present to the buyer a nasty surprise if it turned out that the conditions for exemption at the time of acquisition of the property by inheritance have not been met: as the real estate acquired by inheritance using the tax deduction should now be charged with a liability to which the current owner has nothing to do. And the tax, which is calculated by the tax authorities unilaterally to be paid by the children or the spouse of the deceased person, the former owners of the property, may represent a high percentage of its value.

That is why we always recommend not signing any contract or pre-contract of sale without first checking with the lawyer the problems that may arise in each case. This case is just one example of the many troubles, lying in wait for buyers at the time of signing the contract without diligence. However, there are many other cases, which include a big risk. The tax authorities are currently in need of resources due to the crisis and have at their disposal a large number of idle officials, who are currently engaged in audits of all types of legal transactions in the last four years (inheritance, sale, donation, etc.), looking for an excuse to be able to submit payments of additional taxes that are still enforceable, and require the additional appropriate amount.

Carlos Prieto Cid – Lawyer

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Incoherent land information systems in Spain

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In Spain, it is often the case that entries recorded in the cadastre and the land register (register of deeds) are not identical and the two registries can often contradict the actual plots on the ground.

The reason for this is that the sources of the information differ: in the land register, only information contained in official documents is recorded (e.g. notary certified contracts or judicial decisions); however, the information in the cadastre is submitted and recorded by municipality officials or the tax office.

The function of the information also varies: in the land register, a private individual enters the information which he wishes to defend with the guarantee of the official register; in the cadastre, the administration prepares the information necessary for the calculation of taxes and the enforcement of its own demands.

This potential contradiction is not the only difference between the Spanish and other foreign land registers: another and very important difference in the Spanish land register is the mandatory recording of a building’s description, including details of the construction areas, with a notary certificate, while in other foreign land registers (like in Germany, for example), only the explicit size of the plot (without any description of the buildings) is recorded.  Significantly, this means that if alterations are made to the building, its altered condition must also be updated in the land register with a retrospective notary “New Works Declaration”. However, this is often not done, either through ignorance, a reluctance to pay the notary, tax and registry costs, or more usually because (new) building has not been granted.

Nearly all contracts of sale for property are dependent on the funding of the buyer.  This funding is usually granted by a bank, but always with the guarantee that it is recorded in the land register as a mortgage on the purchased property.  It is therefore very important that the information recorded in the land register does not conflict with reality because any information missing from the land register can mean that the financing bank will not cover the purchase price agreed for the property (this price is agreed irrespective of what is actually stated in the land register). Therefore, if you are intending to put a property on the market as a seller, it is advisable to find out all entries in the land register and cadastre and compare them with the actual plots.

Providing that the correct measurements are recorded in the cadastre, it is relatively simple to amend the land register.  With existing (or older) valid building permission and construction final approval documented by the municipality, things can move forward quickly.  It becomes difficult however when a building or part of a building exists which has not been recorded and for which there is no official approval.  Then only the lengthy and expensive route of gaining planning and building permission through an architect remains.

The situation is different when not only the factual information, but also the legal information recorded is incorrect: this often occurs in the case of inheritances which have not been formalised or when the buyer has not notarized the signed contract of sale.  Because only information contained in official documentation can be recorded in the land register, private contracts of sale cannot be registered.

Carlos Prieto Cid – Lawyer

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