Conditions for profits to be exempt from taxation
If you sell your primary residence, the gain obtained may be exempt from taxes 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.
Additionally, it is essential that both the sold home and the new one, or in its case, the rehabilitated one, are considered primary residences. The reinvestment must be made within the established legal deadlines and conditions. You can reinvest the money obtained all at once or in several installments, 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 deferred payment, it will not be considered out of time if the money received in those installments is allocated to the mentioned purpose within the corresponding tax period. If the amount reinvested is less than the total received, only the proportional part of the gain corresponding to the amount effectively reinvested will be exempt from taxes, provided that the previously mentioned conditions are met.
Exemption for Reinvestment in Primary Residence. Reinvestment within a maximum period of two years
The capital gains resulting from the sale of the taxpayer's primary residence may be exempt from taxes if the total value of the sale is reinvested in the purchase or rehabilitation of a new primary residence. Additionally, the taxpayer may benefit from this exemption if they allocate the funds from the sale of their home to finance a new home under construction, even allowing for self-promotion options.
To apply the exemption, it is necessary to meet two deadlines: reinvest within two years from the transmission and complete the 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 sold home, the total amount considered for the exemption will be the transmission value minus the outstanding loan balance. A transmission of a primary residence is understood to occur when it constitutes your residence at that moment or has been in the two years prior to the sale.
Concept of Primary Residence and Rehabilitation
For tax purposes, a primary residence is considered to be the one 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 job change. For a new home to be considered primary, it must be effectively and permanently inhabited within twelve months of its acquisition or completion of works.
The rehabilitation of the home is assimilated to its acquisition if the works meet certain criteria, such as being subsidized under 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 purchase price, if it was made in the two years prior to the start of the works, or of the market value at the start of the same.
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 exemption for reinvestment, 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 through the subrogation of a loan previously acquired by the seller of the property.
Therefore, when evaluating the reinvestment, the total value of the new home will be considered, regardless of whether its payment has been made in cash or financed. In the case of partial reinvestment, only the capital gain corresponding to the amount actually invested will be exempt from taxes.
Deadline for reinvestment
The reinvestment must be made, either in full or in parts, within a maximum period of two years, counted from date to date, which may be both prior to and subsequent to the sale of the previous primary residence. It will be considered that the reinvestment is made on time if the sale was made in installments or with deferred payment, as long as the amount received is used as provided 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 return their intention to reinvest under the established conditions and deadlines.
Due to the state of alarm due to the COVID-19 epidemic, the two-year period for reinvestment was suspended from March 14, 2020, the date on which Royal Decree 463/2020 came into force, until May 30, 2020. Additionally, the period stipulated in article 41 bis.3 of the Personal Income Tax Regulation, which starts counting from when the home ceases to be primary until its sale, was also affected by this suspension. Non-compliance with conditions
Failure to comply with any of the conditions will mean that the portion of the capital gain involved will be subject to taxes. In such a situation, the taxpayer must allocate the non-exempt capital gain to the year in which it was obtained, submitting a supplementary tax return, including late payment interest, and must do so between the date of the breach and the end of the regulatory declaration period corresponding to the tax period in which the breach occurs. If you are in this situation, our real estate agency can help you file the declaration, relieving you of the work of seeking advice and resolving any doubts.
