What is the capital gain tax and why do I need to know about it?
The capital gain refers to the difference between the purchase value of an asset and the sale price, which can be translated into an economic gain if the result is positive. If this difference is negative, this is known as a capital loss. This tax is subject to taxation in many countries, including Spain, and you must declare it accurately to comply with tax regulations.
Capital gains obtained by residents in Spain are included in your personal income tax and are taxed at the income tax rate, which varies according to the amount of the gain and the taxpayer's other income, such as salary. There are certain tax reductions and benefits that may apply in certain situations.
National capital gains tax vs municipal capital gains tax (otherwise known as Plusvalía tax or increase of the land value)
Capital gains and municipal Plusvalía are related but they are two different concepts. Capital gains refers to the profit obtained from the sale or transfer of a property, while the municipal Plusvalía is a municipal tax levied on the increase in value of urban land experienced over a given period of time. This municipal tax is based on the general rule that, when a property increases in value due to the revaluation of the area, the seller of the property must compensate the corresponding Town Hall for the profits generated.
It is important to understand the difference between these taxes, as capital gains are declared at state level to the tax office and municipal Plusvalía are settled at local level to the corresponding Town Hall. Both cases have different tax rates. It is worth mentioning that property owners who sell their house and do not make a profit from it, can take advantage of a tax benefit and will not have to pay this municipal tax, but they will be obliged to present it.
How is capital gains tax calculated in Spain?
The capital gain is calculated by deducting the acquisition value of the asset (purchase price plus associated costs) from the transfer value (sale price minus associated costs). The result represents the capital gain or loss obtained.
The Purchase Value corresponds to the price paid for the asset at the time of acquisition. It may also include the expenses associated with the purchase, such as taxes paid, notary fees, registration fees, lawyers, and estate agents' commission. The sale value is the price obtained for the sale of the asset, from which expenses related to the sale, such as legal fees, estate agents, Plusvalía tax and improvements made to the property, can be deducted.
The tax rate will depend on the capital gain obtained. For the year 2024, the tax rates are as follows:
- Up to 6.000 euros: 19%.
- From 6.000 euros up to 49.999 euros: 21%.
- From 50.000 euros up to 199.999 euros: 23%.
- From 200.000 euros up to 300.000 euros: 27%.
- More than 300.000 euros: 28%.
Here is an example of a capital gain for the sale of a property:
Suppose a tax resident in Spain acquired a property in 2016 for 300.000 euros and decides to sell it this year for 500.000 euros. The costs associated with the purchase would be 25.000 euros and the costs associated with the sale would be 36.000 euros.
Capital Gain = Sale Value - Purchase Value = 464.000 euros – 325.000 euros = 139.000 euros
The Capital Gain in this case would be 139.000 euros. If we apply the above table, the tax payable would be: 30.850,02€.
How much is capital gain tax in Spain? Is it the same for EU citizens and non-EU citizens?
In Spain, capital gains are subject to different tax rates depending on the nature of the asset and the period of holding. In general, EU citizens and non-EU citizens are subject to the same tax regulations regarding capital gains. However, it is important to consider double taxation treaties that may affect foreign taxpayers.
How to avoid capital gains tax in Spain?
It is not possible to avoid this tax in Spain, however, all is not lost, there are several legal strategies to minimise the tax impact of capital gains in Spain. Some of these strategies include the application of available tax exemptions and deductions, advance tax planning and optimising the structure of the transaction. It is essential to consult with a specialised tax advisor in order to identify the best strategies in each particular case.
Exemptions to capital gain tax in Spain:
In Spain there are certain situations in which capital gains may be exempt from taxation, such as the sale of the main residence for reinvestment in another main residence, or gains obtained by persons over 65 years of age under certain conditions.
Deduction for reinvestment in your habitual residence:
You will be able to apply this exemption to those capital gains that arise from the disposal of your main residence as long as the total amount obtained from the sale is reinvested in the acquisition or refurbishment of a new main residence, as well as in a construction situation, including the possibility of self-promotion. Likewise, in order to be able to apply this exemption for reinvestment in the case of self-promotion, you must take into account two deadlines:
1. a period of two years to reinvest the amount obtained in the transfer
2. another period of four years to finish the construction from the start of the investment by acquiring ownership of the new home.
The tax office considers that you are transferring your habitual residence when it constitutes your current residence or has been considered as such up to any day in the three years prior to the date of transfer (there are some exceptions to this rule).
- How does the tax office define a main residence?
For tax purposes, the habitual/main residence is considered to be the property in which the taxpayer resides for a continuous period of at least three years. It also includes the attached elements of the property, such as the garage or the storage room. However, it will be understood that the property was considered to be the habitual residence when, although this period has not elapsed, the taxpayer dies or there are other circumstances that necessarily require a change of domicile, such as marriage, separation, transfer of employment, obtaining the first job or change of employment or other similar justified circumstances.
- Total or partial reinvestment
In order to apply this exemption for reinvestment, the total purchase value of the new home will be taken into account, regardless of whether the amount has been paid at the time or financed. In the case of partial reinvestment, only the amount used for the investment in the new main residence will be exempt, so the current tax rates will apply to the difference.
- Deadline for reinvestment
The reinvestment must be made, either once or successively, over a period of no more than two years, which may be not only the years after but also the years prior to the sale of the previous main residence.
Transfer of the main residence by individuals over 65 years of age
An exemption of the capital gain applies whether the habitual residence is transferred in exchange for capital or in exchange for an investment (fixed income). The requirements are that the property has been the main residence during the three years prior to the date of sale and the owners are over 65 years of age. In this case, the sale of the property will not have to be declared in the Income Tax Return.
What happens when a non-resident in Spain sells a property for tax purposes? Is the capital gain declared in the same way?
Non-residents who sell a property in Spain must file non-resident income tax to declare the capital gains obtained. Capital gains obtained by non-residents are subject to a withholding tax of 3% on the amount obtained on the transfer. This withholding is applied at the time of the transfer of the property and acts as a payment on account of non-resident tax, which must be paid to the tax office within one month of the transaction by the purchaser of the property. Once this first month of the sale of the property has passed, the seller has a deadline of three months to declare his capital gain. The tax rate applied to the actual gain is 19%. It is important to bear in mind that, although the tax rate is fixed, there may be international treaties in place to avoid double taxation.
Can I apply for a tax credit when I cease to be a tax resident in Spain? The answer is yes!
If you move your tax residence from Spain to another country, from 1st January 2015, taxpayers resident in a Member State of the European Union or in a Member State of the European Economic Area with which there is an exchange of tax information, are entitled to exemption from taxation on the capital gain obtained on the transfer of what was your main residence in Spanish territory, provided that the amount obtained on the transfer is reinvested in the purchase of a new main residence.
When the amount reinvested is less than the total amount received in the transfer, this exemption can only be applied to the proportional part of the capital gain obtained that corresponds to the amount reinvested.
There are two ways of applying the exemption for reinvestment in the main residence:
- Apply the exemption when self-assessing the tax corresponding to the capital gain on the form itself. This first option is only applicable when the reinvestment has taken place prior to the date on which the tax return must be filed.
- If the first option is not chosen, the taxpayer who has ceased to have their permanent residence in Spain must file a refund application using the form “application for refund for exemption for reinvestment in main residence for EU and EEA taxpayers with exchange of information.”
What if I move my residence from a European Union or European Economic Area country to Spain?
In this case, you will be considered a tax resident in Spain, and you will also be eligible for the tax credit for reinvestment in your main residence, provided that the amount obtained from the transfer of your previous main residence located in a European Economic Area country is reinvested in the purchase of a new main residence located in Spain.
Count on us! We can help you optimise your taxes
We have already seen how the tax system works in Spain when we sell a property or any other type of asset, however, there are rules and exemptions that in certain cases can be complicated to apply, especially if you are a foreigner.
The tax department of Franke de la Fuente can help you with the most complex procedures. We will study your situation in detail, resolve your doubts and help you to optimise all your taxes in Spain.
