When selling a property, owners must comply with certain tax obligations, which involve paying part of the proceeds to the Tax Agency.
From a fiscal perspective, there are two key taxes to consider: the Personal Income Tax (IRPF), declared in the annual tax return, and the municipal capital gains tax, managed by the local council of the municipality where the property is located.
What taxes must be paid when selling a property?
When selling a property, not all the money received stays with the seller. A portion must be allocated to fulfill tax obligations, the main one being the Personal Income Tax (IRPF), which applies to the capital gain generated by the transaction.
Personal Income Tax: Taxation of capital gains in the tax return
The Tax Agency considers a capital gain to exist when the sale price of the property is higher than the purchase price. This positive difference must be declared in the annual personal income tax return and taxed according to the rates established by current tax regulations.
How is the capital gain from the sale of a property calculated?
The capital gain is the financial profit obtained when a property is sold for a higher price than its original purchase price. To calculate it, the following formula is used:
Capital gain = Sale price – Purchase price – Deductible expenses
What counts as deductible expenses?
Some of the expenses that can be deducted from the purchase price, provided they are properly documented, include:
• Notary and registration fees related to the purchase of the property.
• Investments in renovations or improvements, as long as they are backed by invoices.
• Fees for real estate agencies or other intermediaries involved in the transaction.
These expenses help reduce the capital gain subject to taxation under the personal income tax.
In which cases is personal income tax not due on the sale of a property?
Although the transfer of a property may generate a taxable capital gain, there are several situations in which the Tax Agency allows for a tax exemption, freeing the taxpayer from paying this tax.
1. Reinvestment in a primary residence
If the amount obtained is reinvested, fully or partially, in the purchase of a new primary residence, the taxpayer may benefit from a proportional exemption on the capital gain, provided that the legal requirements are met.
2. Sellers over 65 years old
Individuals over 65 are exempt from paying tax on the capital gain generated from selling their primary residence, even if they do not reinvest the proceeds.
3. Deed in lieu of foreclosure (Dación en pago) of the primary residence
In cases where the property is handed over to the bank to cancel a mortgage debt (dación en pago), the exemption from personal income tax may also apply, as long as it concerns the debtor’s primary residence.
4. Persons with dependency status
Individuals in situations of severe or great dependency may also be exempt from tax when selling their primary residence, under certain conditions.
Municipal capital gains tax: the local tax on land value increase
The second relevant tax in the sale of a property is the municipal capital gains tax, officially called the Tax on the Increase in Value of Urban Land (IIVTNU). This tax is managed by the town hall where the property is located and applies to the increase in value of the urban land from the time of acquisition until the moment of sale.
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