Conditions for gains to be exempt from taxation
If you sell your primary residence, the gain obtained may be exempt from tax if you reinvest all the money in the purchase of another primary residence or in the rehabilitation of the one you plan as your new residence. To apply this exemption, it is not an automatic process; you must show your intention to take advantage of it.
In addition, it is essential that both the sold and the new or, as the case may be, the rehabilitated home are considered to be habitual residences. The reinvestment must be made within the established legal terms and conditions. You can reinvest the money obtained at once or in several times, but always within a period not exceeding two years, either before or after the sale of the previous home.
If the sale is made in installments or with a deferred price, it will not be considered out of time if the money received in such installments is used for the aforementioned purpose within the corresponding tax period. In the event that the amount reinvested is less than the total received, only the proportional part of the gain corresponding to the amount effectively reinvested will be tax exempt, provided that the conditions previously indicated are met.
Exemption for Reinvestment in Habitual Housing. Reinvestment within a maximum period of two years.
Capital gains resulting from the sale of the taxpayer's principal residence may be exempt from tax if the total value of the sale is reinvested in the purchase or rehabilitation of a new principal residence. In addition, the taxpayer may benefit from this exemption if he/she uses the proceeds from the sale of his/her home to finance a new home under construction, even allowing for self-promotion options.
To apply the exemption, two deadlines must be met: reinvestment within two years from the transfer and completion of construction within a maximum of four years from the start of the investment to acquire the new property. If a loan was used to acquire the property sold, the total amount considered for the exemption will be the transfer value minus the outstanding balance of the loan. It is understood as a transfer of the habitual residence when this constitutes your residence at that time or has been your residence in the two years prior to the sale.
Habitual housing concept and rehabilitation
For tax purposes, the habitual residence is considered to be that in which the taxpayer resides continuously for at least three years.
However, this requirement is relaxed in the event of death or circumstances such as marriage, separation, job transfer or change of employment. In order for a new dwelling to be considered habitual, it must be effectively and permanently inhabited within twelve months after its acquisition or completion of the construction work.
The rehabilitation of housing is assimilated to its acquisition if the works meet certain criteria, such as being subsidized according to Royal Decree 233/2013 on the promotion of rental and rehabilitation or involving the structural reconstruction of the same, provided that the cost of these exceeds 25% of the acquisition price, if this was done in the two years prior to the start of the works, or of the market value at the start of the works.
In these calculations, the proportional value of the land is deducted from the acquisition price or market value. Total or Partial Reinvestment To take advantage of the reinvestment exemption, it is not necessary to use all the money obtained from the sale of the previous home. It is feasible to use funds borrowed from another person, either directly or by subrogation of a loan previously acquired by the seller of the property.
Therefore, when assessing the reinvestment, the total value of the new home will be considered, regardless of whether it has been paid in cash or financed. In case of partial reinvestment, only the capital gain corresponding to the amount actually invested will be exempted from taxation.
Time limit for reinvestment
The reinvestment must be made, in whole or in parts, within a maximum period of two years, counted from date to date, which may be either before or after the sale of the previous habitual residence. The reinvestment will be considered to be made on time if the sale was made in installments or with deferred payment, provided that the amount received is used as intended within the tax period in which it is received. If the reinvestment is not made in the same year in which the property is sold, the taxpayer must declare in the corresponding tax year his intention to reinvest under the established conditions and deadlines.
Due to the state of alarm due to the COVID-19 epidemic, the two-year deadline for reinvestment was suspended from March 14, 2020, the date on which Royal Decree 463/2020 came into force, until May 30, 2020. In addition, the period stipulated in Article 41 bis.3 of the Personal Income Tax Regulation, which starts to run from the time the home ceases to be habitual until it is sold, was also affected by this suspension. Non-compliance of conditions
Failure to comply with any of the conditions will imply that the part of the capital gain involved will be subject to tax. In such a situation, the taxpayer must allocate the non-exempt capital gain to the year in which it was obtained, submitting a complementary return-settlement, including default interest, and must do so between the date on which the non-compliance occurs and the end of the regulatory period for the tax return corresponding to the tax period in which the non-compliance occurs. If you are in this case, from our real estate agency we can help you to file the tax return, relieving you of the work of looking for advisors and resolving any doubts.