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Plusvalía: The changes to Spain’s property tax that home owners should know about

Home owners in Spain who intend to sell or pass on a property should be aware of the important changes to the country’s plusvalía taxes, which can amount to thousands of euros.

Plusvalía: The changes to Spain's property tax that home owners should know about
The Spanish government wants to give property sellers more choice when it comes to paying the plusvalía tax whilst also ensuring town halls don't run out of money. Photo: Dominique Faget/AFP

What is Spain’s plusvalía tax?

Plusvalía is a land value tax charged by town halls on urban properties which are sold, donated or inherited. 

In general terms, it sees municipalities tax the increase in value of urban land on which the property is located from when it’s bought until it’s sold. 

The person who sells or donates the property usually has to pay this tax, which varies between regions and municipalities. 

It is possible for buyer and seller to negotiate sharing the tax and when it comes to inherited properties it’s the person who the home is passed onto that has to pay. 

The argument used by town halls to charge plusvalía is that through public improvements carried out in a given area, the municipality has contributed to increasing the value of the property and its location, thus deserving a cut.

Plusvalía has to be paid within 30 days of the property transferring hands.

This tax is also called Impuesto sobre el Incremento del Valor de los Terrenos de Naturaleza Urbana (IIVTNU) – Tax on the Increase in the Value of Urban Lands – which no doubt explains why the term plusvalía is more commonly used instead.

Why is the plusvalía tax making headlines in Spain?

On October 26th 2021, Spain’s Constitutional Court ruled that the country’s plusvalía property tax was unconstitutional, in effect annulling the calculation used to charge this tax. 

The main reason for this is that judges found that even if there hadn’t been an actual land value increase, sellers, donors or heirs were being automatically charged this tax by town halls.

The Constitutional Court’s decision comes after years of formal complaints launched by house sellers across Spain who said they were being unfairly charged plusvalía. 

The judges’ verdict isn’t retroactive, so those who’ve had to pay the plusvalía tax up until now will not be reimbursed. 

But it has left Spain’s property market in somewhat of a legal and financial limbo, where some homeowners who were intending to sell are now rushing to fast-track the process, whilst municipal authorities from all sides of Spain’s political spectrum are complaining that one of their main sources of public funding will dry up.

In Madrid for example it represents €500 million of the yearly amount added to public coffers, around a tenth of the total. 

But in other municipalities such as Torrevieja in Alicante, Casares in Málaga or Villaviciosa de Odón outside of Madrid, authorities would lose between 30 and 24 percent of their tax income.

Spain’s PSOE government appears to have listened to calls by local authorities in the country and is now set to pass a law which will see plusvalía return to Spanish property legislation but with different conditions.

What changes will there be to Spain’s plusvalía tax?

Spain’s Council of Ministers approved a new version of this municipal capital gains tax on Monday November 8th. 

The law will see Spain’s Hacienda tax agency give two options to calculate the tax on municipal capital gains and the taxpayer will be able to choose the one that is most favourable to them.

They’ll be able to choose to calculate the amount by applying the new calculations on the “valor catastral” (Spain’s rateable value of a property used to calculate property taxes), which you get by multiplying this cadastral value by the number of years that have elapsed since the operation. 

Plusvalía has to be paid within 30 days of the property transferring hands. . Photo: Nacho/Flickr

Or, alternatively, they can estimate the value increase by calculating the difference between the purchase price and the sale price.

So far the biggest beneficiaries of this change are thought to be people who bought properties after the real estate bubble burst in 2008. On the other hand, it will no longer be possible to buy and sell a property in the same year and avoid paying plusvalía tax as was previously possible. 

The aim is to amend the clauses of the previous plusvalía law which the Constitutional Court annulled whilst ensuring local governments don’t all of a sudden lose the €2.5 billion they receive every year through this tax. 

The cadastral coefficients will be updated annually according to the evolution of the real estate market as will the calculation used to calculate the taxable base of the plusvalía, which will no longer be determined by the IBI (yearly property tax).

EXPLAINED: How to pay less Spanish IBI property tax

The decree will allow municipalities to reduce the cadastral value of the land  by 15 percent depending on the state of the market. 

Crucially, when there is no increase in the value of the land, the operation will not be subject to the plusvalía tax.

It is also “guaranteed that no one who carries out a sale at a loss will have to pay plusvalía,” Spain’s tax agency has declared. 

It was previously possible to claim back the plusvalía in cases when a profit wasn’t made, but the new law should eliminate the need for this process for the seller.

Town halls across Spain will have six months to apply these changes. 

How do I calculate my plusvalía?

Factors determining how much plusvalía people have to pay include how long the person has owned the property (the higher the more to pay, 20 year ownership equates to the maximum tax base), the location of the property and its size.

This, together with regional differences mentioned earlier, means it’s not easy to give a broad idea of how much each property seller in Spain has to pay for plusvalía, but here’s an example.

If a person who’s owned a flat in Madrid for 15 years which is worth €150,000 according to its cadastral value wants to find out their plusvalía before selling, the calculation is as follows:

Tax base for ownership years (2.8 percent for 15 years in Madrid) 

X

Cadastral property value (€150,000)

= €63,000

 

€63,000 

X

29 percent (current tax percentage in Madrid)

= €18,270 to pay in plusvalía

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PROPERTY

How to turn a bar, office or shop into a residential property in Spain

Commercial properties in Spain can be a lot cheaper than residential ones, but it’s not as straightforward as buying a former restaurant, office or shop and moving in. Here are the steps to follow and what you need to be aware of.

How to turn a bar, office or shop into a residential property in Spain

One of the tricks budget property hunters in Spain have been using in recent years is buying a local (commercial property), oficina (office) or nave (industrial unit) and transforming it into a vivienda (residential property) to live in or let out. 

It’s a trend that’s roughly doubled in big cities such as Madrid and Barcelona in the last five years. 

Buying a commercial property can work out to be 50 percent cheaper than a flat or house in Spain and there can be other advantages such as it being more open plan than Spain’s typical corridor-themed apartments as well having more money to invest in the renovation. 

Is it possible to turn a commercial property into a residential property in Spain?

Yes, in theory it is, but it’s not always possible. The rules relating to a change of property’s usage from commercial to residential or vice versa are determined by each municipality in Spain, so before you rush to buy un local, you have to do your homework first and be aware of some of the most common pitfalls.

It could be that the limit of residential properties per hectare has been surpassed already, or that without some major changes the property doesn’t meet the standards of size, rooms, space, height, layout, ventilation, air extraction or light of the town or city hall. 

It isn’t the most straightforward process and depending on the property and the individual municipal rules in place, it might just not be possible to live in the property or rent it out to others.

Living in a commercial property is illegal and may cause you problems such as not being able to activate water and electricity or register your padrón at the town hall.

Despite all the paperwork needed, flipping a bar or office and turning it into a home usually works out cheaper than buying a residential property in Spain. (Photo by ANDER GILLENEA / AFP)

Don’t be discouraged however, as in many cases it is possible to change the use of a property from commercial to residential and in regions such as Galicia authorities are currently facilitating the process to address the matter of empty abandoned stores and the lack of well-priced accommodation for young homeowners.

What are the steps to follow in Spain to change a property from commercial to residential?

Check the statutes of the community of owners: In order to make any changes within the community of neighbours, permission must be requested in advance. Beforehand, you can ask the comunidad president for a copy of the community statutes to see if the change of use from commercial to residential is mentioned.

READ ALSO: ‘La comunidad’ -What property owners in Spain need to know about homeowners’ associations

Request permission from the town hall: After getting the green light from la comunidad, you have to go to the ayuntamiento (town hall) of the town where the property is to find out if it’s possible to add another residential property to the finca (building). 

Even if this is confirmed, it doesn’t certify that the change of usage from commercial to residential is allowed, for which the town hall will ask you to provide an architect’s proyecto técnico or feasibility report based on municipal urban laws. You will only be allowed to swap from commercial to residential if the project meets the safety and habitability requirements of the Technical Building Code (Código Técnico de la Edificación).

Get the Building Licence: Known as licencia urbanística or permiso de construcción in Spanish, this is an official document required by the town hall for you to carry out a construction or renovation project. In other words, you’ll need this municipal authorisation to begin work on your future residential property, whether it’s major work or minor . 

Get the Certificate of Habitability: Once the renovation work is complete, you’ll need the cédula de habitabilidad to be able to move in or let the property out . The conditions for this are regulated by each regional government and again it’s an architect who must prepare a technical report in order for a town council technician to issue the certificate of habitability.

The certificate we need for the change of use is that of primera ocupación (first residential occupation), which has to include the usable surface area of ​​the home, rooms, address, location, maximum inhabitants etc.

How much does it cost to transform a commercial property into a residential one in Spain?

If for example it’s a 80m2 property with two rooms, the total would be about €50,000, according to property websites Idealista and Habitissimo, with the bulk covering renovation costs (€500/m2= €40,000) and the rest going to cover permits, architecture costs and taxes.

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