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Binding Resolution of the General Directorate of Taxation: Deductible expenses for the sale of real estate

06aug

Binding Legal Ruling from the State Tax Office, V5370-16 dated 20th December 2016

 Body: SG of Individual Income Tax Return

  •  Date: 20th December 2016
  •  Ruling number: V5370-16

Regulation

LIRPF. Law 35/2006, Art. 35.

Question

- Requested information concerning what expenses and investments made on a property purchased in 2002, are subject to tax relief on working out the capital gains at the moment of its sale.

- Which are the expenses that increase the value of the property. Request a breakdown of the reforms, in the case these are subject to tax relief.

Description

Corresponds to the question put forward.

Answer

The transfer of a property generates to him placing the question of profit or loss in patrimony, on producing a variation in the value of his patrimony that is revealed through an alteration in its arrangement, in accordance to that appearing in article 33.1 of the Law 35/2006, dated 28th November of an Individual Income Tax Return and with the partial modification of the laws of Company Taxes, the non Residents Income Tax declartion and Capital Gains (BOE dated 29th November), hereinafter LIRPF, and, therefore, it will be subject to tax, in accordance to that appearing in article 6.1.

Article 35 of the LIRPF states the following concerning the transfers to onerous matters:

“1. The value of purchase will be formed by the sum of:

a) The real amount for which said purchase would be effected.

b) The cost of the investments and improvements made in the purchased assets and the expenses and taxes attached to the purchase, excluding the interest that may have been paid by the purchaser.

In the conditions that by law are specified, this value will reduce in the amount of the repayments.

2. The transfer value will be the real amount for which the transfer has been made. From this value will be deducted the expenses and taxes referred to in letter b) of section 1 as long as they have been paid by the seller.

The real value of the transfer will be that in effect paid, as long as this is not less than the normal market value, in which case will prevail that.”

The amount of this profit or loss of patrimony will be determined, as per article 34, by the difference between the respective values of purchase and of sale, calculated in the manner established in articles 35 and 36 of the mentioned Law, for onerous and profitable transfers respectively.

Therefore, in this case, in accordance to the information given in your letter, in order to determine the profit or loss in patrimony, in accordance to that established in article 35 of the Tax Law, will form part of the purchase value that of the real value of the purchase of same, as well as the corresponding investments and improvements made in the home and the expenses and tax attached to the purchase, excluding interests, that would have been paid by the purchaser.

With respect to the expenses and taxes attached to the purchase, in accordance to the views of this Managing Department in different tax enquiries (enquiries linked V2584-16 and V0131-04), these are those such as, amoungst others, notary expenses, property registry, gestoria, lawyer, Tax on the Increase of Value of Urban Land corresponding to the home and paid when purchased, and the expenses  for the Transfer Tax.

In spite of the above, it should be pointed out that, specifically, with respect to the tax of Increase of Value of Urban Land, and in accordance to the views of this Managing Department (enquiry linked V1649-13), according to that stated in article 106.1 of the Royal Decree Legislative 2/2004, dated 5th March, in which is approved the Adapted Text of the Regulating Law of the Local Tax Offices (TRLRHL), the tax payer of the Tax of Increase of Value of Urban Land in the cases of sale of lands in an onerous manner will be the seller. However, to such effect it will be necessary that the person making this enquiry, purchaser of the property, shows that, although not being the tax payer of this tax, agreed with the seller that he accepted the payment of this tax. Such accreditation must be made by any method of proof admitted by Law, as stated in article 106 of the  Law 58/2003, dated 17th December, General Tax (BOE of 18), before the bodies of Management and inspection of the Tax Office to who it will correspond the value of the evidence provided.

However, if the purchase was carried out in a profitable manner, the value of purchase and Inheritance and Donation tax (V2275-06) will form part of this value. At the same time will also form part of the purchase value, the paid amounts of VAT not deducible, that at the time may have encumbered the purchase of the property, excluding those that may correpond to interests (enquiry not binding number 0808-02, dated 28th May 2002).

On the other hand, the concept of improvement does not specifically appear in the regulation of the Individual Income Tax Return. However, the Resolution dated 1st March 2013, from the Institute of Accounting and Audit of Accounts, in which is pronounced rules of registration and assessment of fixed assets and real estate investments (BOE dated 8th March 2013), in the section 3 of its second rule understands that by “improvement” is the joint activity through which is produced a change in an element of the asset, increasing its previous productive efficiency.

To the contrary, will not form part of the purchase value those expenses of repair and upkeep of the home which are referred to in the Tax Regulation (approved through the Royal Decree 439/2007, dated 30th March, BOE dated 31st March), in its article 13, which show the deducible expenses in the decision of real estate capital return.

At the same time, the section 3 of the second rule of the mentioned Resolution of the Institute of Accounting and Audit of Accounts describes the concept of extension, that consists in a process through which are included new elements to an asset, therefore obtaining a larger productive capacity.

In accordance with these rules, it should be understood that that considered as repairs and upkeep are those required to maintain the serviceable life of the home and its productive capacity or of use, whilst can be considered as extenison  or beneficial improvements, the increase of capacity or habitability of the home, in a lengthening of its serviceable life.

On the possible investments that the person enquiring may have carried out of extension or improvements, these would form part of the purchase value of the property.

Therefore, if the person enquiring has carried out in his home reform works, depending on what these are, same could be classifiede as improvements or extension, in which case it should be taken into account on calculating the purchase value of the property sold, or, those of upkeep and repair, which should not be taken into account in said calculation.

As these are questions of fact the tax payer  must duly prove, at the time, the different works by any means of evidence admitted by Law, as stated and explained above, the article 106 of the Law 58/2003, dated 17th December, General Tax, before the Management and inspection departments of the Tax Office, to whom will correspond its assessment and requirement of same.

In general, the justification, both of the mentioned expenses as well as any other for payments that the person consulting has made, should be carried out with an invoice issued by the person who has effected the Works or rendered the service, who should possess the requirements established in the article 3 of the Royal Decree 2402/1985, dated 18th December, or, more recently, in article 3 and 6 of the Royal Decree 1496/2003, dated 28th November (BOE 29), in which is ruled, successively, the duty of issuing and delivering an invoice that concerns businessmen and professionals, as well as to keep the receipts of the works carried out.

On the other hand, in order to determine the patrimony profit or loss, as far as the transfer value is concerned, this will be the real amount for the sale that has taken place, as long as this is not less than market value, in which case this value will prevail, from which will be deducted the expenses and taxes pertaining to the transfer that would have been paid by the seller, such as, amoungst others, Tax on Increase of the Value of Urban Land, real estate agency expenses (for example, amounts paid for the commission of real estate agent), and notary expenses (V2584-16, dated 13th June 2016, and V2275-06, dated 16th November 2006).

With respect to the Tax on Increase of the Value of Urban Land that corresponds to the seller, this Tax must be paid by same. If it is agreed that the purchaser pay the mentioned tax, this implies a higher value of purchase of the property and does not reduce the transfer value of the seller.

This I communicate to you, with binding effects, as per that appearing in the section 1 of article 89 of the Law 58/2003, dated 17th December, General Tax.

 

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