Investing in real estate in Spain has increased substantially over the last few years and foreign investors should carefully consider the tax implications. Understanding the tax system is crucial to avoid unnecessary extra costs.
To properly structure the acquisition, the purpose of the investment, the country of residency of the investor and the way in which the acquisition will be financed are always relevant factors to consider.
Where the purpose of the investment is to enjoy the property for private use, acquisition should, generally, be carried out directly by the private investor in his or her individual name. Taxes on the acquisition of property is mainly VAT at the present rate of (10%) or Transfer Tax which varies on a sliding scale 8%-10% in Andalucia, both are usually an added cost to the buyer. Taxes during holding period are limited to the deemed income (1,1% on cadastral value) which is taxed at 19% (24% for non-EU residents). Capital gains upon the sale are taxed in most of the cases at the present rate of 19%. Private investors who acquired the property in 2012, will be entitled to apply a 50% exemption on the capital gain realized upon the sale of the property.
The acquisition of the property as an individual could trigger annual Wealth Tax, which is still applicable in Andalucia (not applicable in Madrid or some other Spanish regions). Wealth Tax generally applies if the cost of the investment located in Andalucia (net of related indebtedness) exceeds €700.000.
Therefore, careful consideration should be given to Wealth Tax, since depending on the country of residence of the investor (EU investors benefit from a favorable regime) and/or the location of the majority of the investment in other regions of Spain, domestic location or tax treaty rules will affect whether the tax is or not applicable.
Where the purpose of the investment is to rent the property, short or long term, consideration should be given to setting up a company for carrying out this business. Setting up a corporate structure to run the rental business may be worthwhile for legal protection, other than for tax reasons.
While companies are taxed at the current rate of 25% (15% under certain circumstances or even 4% or 0% under specific regimes) on net income, non-resident individuals running a rental business are taxed at 19% on net income if they are EU residents and 24% on gross income if they reside out of the EU. On the other hand, companies are entitled to carry forward losses that could be used to off-set future gains, while individuals are not.
Click to see published article: Investing-in-Real-Estate-Sept19