Legal and Tax Considerations When Buying Property in Spain

Legal and Tax Considerations When Buying Property in Spain

All the Legal and Tax Considerations When Buying Property in Spain, that you need to know before to buy a property in Spain.

It is possible to buy a property in Spain without being a Spanish resident as there are no restrictions for foreign purchasers whether you are buying a commercial, residential or rental property. In fact, foreign investment in real estate is encouraged by the Spanish government.

Purchasing property in Spain is a different process than doing so in the United Kingdom.  You should approach the purchase as you would any legal transaction, with the help of a legal real estate expert.  You should ensure that your lawyer is independent, meaning they represent only your interests, and that they are experienced and qualified to practice real estate law in Spain. As all contracts will be drafted and written in Spanish by a Spanish notary, it is a good idea to have the contract translated to English by an independent translator as well.

Like any good lawyer, a real estate lawyer who is qualified to practice in Spain will make sure that the sale contract you sign is in your best interests.  You may find that the seller is asking you to sign an “as seen” contract which provides them with protection in the event they have withheld certain information or did not disclose known issues with the property or structure to you prior to sale.  In this scenario, you may have difficulty getting compensated for any problems you discover with your newly acquired home down the road.

It is in your best interests as a buyer to have a contract that requires full disclosure and legal recompense for after discovered issues that were known about by the buyer. It is also possible for the Spanish lawyer to hold an amount of funds to be released upon resolution of any highlighted issues if any are found prior to the sale. In addition, there are two different types of property purchase contracts in Spain.  There are both the “right to buy” and the “sale” contract.

Your lawyer should advise you which one is best for your situation given the facts surrounding your purchase and the benefits and risks associated with each type of contract. Because certain contracts provide more protection for the buyer and certain contracts provide more safeguards for the seller, it is of paramount importance that your attorney is independent and advising you with your best interests in mind.  Do not simply engage in a purchase on the advice and counsel of the seller’s agent or the property developer’s attorney.

After you have found a property for purchase and negotiated the sale terms with the seller, you will sign a preliminary contract, the  “contrato privado de compraventa” and pay them a deposit. This deposit is typically 10% of the purchase price. After the preliminary contract is signed, you need to secure financing from a mortgage lender. 

You should be sure to confirm that the mortgage lender is authorized to lend in Spain.  You can confirm this by checking with the Bank of Spain. Something to note is that if you default on your Spanish mortgage, the lender can repossess the property.  In addition to this, if the value of the property is less than the total debt you have outstanding with the lender (whether this is because the property value has plummeted in the time since you made the purchase or you have borrowed against the property in succeeding years), the bank may pursue your UK assets to recover the mortgage shortfall using something called a European Enforcement Order.  

So be weary of the idea that if you couldn’t keep up with your mortgage payments because of unexpected financial hardship, that you could simply walk away from the property; your other real estate and investments could potentially be at risk here as well.

When purchasing a property in Spain there are certain things you want to make sure you look out for. You should make sure that all of the planning permits are in order and that the property is being legally built (if it is new construction). This is information you should be able to receive from the local town hall. You should also consult an architect or a surveyor to confirm that the property is as described and is structurally sound.

You will also want to confirm that there are no tenants currently residing in the property (as you don’t want to become an unintended landlord who now faces the prospect of evicting an unwilling participant in the sale) and that the property is not part of any form of special programs such as designated low income housing.

Make sure you have seen the land registry extract and confirmed the following:

  1. The property and the land for sale match the details that are registered with the relevant property registry.
  2. The sellers in the transaction are indeed the registered owners with whom you are contracting.
  3. There are no current debts or liens against the property such as an outstanding mortgage. It is very important to confirm this issue as, in Spain, any mortgage or debt tied to the property is transferred to the new owner when the property is sold.  This may include, a mortgage, payments due to tenants associations, or back property taxes.
  4. There are no legal proceedings against the property for contravention of land planning law.

Unfortunately, there is no centralized government source or individual to whom you can turn for all of the relevant information.  This is again why it is important to secure good counsel from an independent attorney before proceeding with the purchase of any property.

If you plan to buy new construction that is “off-plan”, there is another laundry list of items that you want to have investigated and confirmed before proceeding with the purchase. Of primary importance, is ensuring that the property developer has an insurance policy that will adequately cover any potential damages caused by structural defects.  Spanish law also protects you in this regard by allowing you to secure all the payments you have made to the developer with a bank guarantee called an “aval bancario.”

This safeguards your payments made to the developer from fraud so that they cannot simply take your money and never complete the development project.  Finally, you will want to ensure that the property has been certified by a qualified architect and registered as a new building in the property register.

After the purchase has been completed and the final contract is signed in the presence of a notary, you will be required to pay property sales taxes.  The taxes you are required to pay depend on whether the property is a new home purchased from a developer, or an already existing home bought directly from the current owner.  When buying a new construction home, you will need to pay something called the valued added tax “the VAT.” This tax consists of 10% of the purchase price.  This is paid directly to the seller along with the purchase price of the home.  Additionally, you will need to pay something called “stamp duty” to the government of the region in which you have purchased the property.  This is 1.2% of the purchase price.  When purchasing an existing home, you do not need to pay VAT, but instead a property transfer tax of between eight and ten percent is required.  This is, again, paid to the region where the home is located.

In addition to the above legal considerations you must be aware of when purchasing your Spanish property, there are some, often forgotten, income tax consequences of becoming a Spanish home owner.  As a non-resident property owner in Spain you must file a “Declaracion de la Renta” or “Non Residents annual tax return.”  This tax return is where you will report and pay taxes on any income from your Spanish home.

You need to file it even if you don’t engage in economic activities and merely use your Spanish property for holidays. This is true even if you do not rent your home in Spain and it lies empty when you are not using it over your holidays.  This is because the Spanish government will impute something called “deemed rental income.”  This is calculated as a percentage of your “Valor Catastral” or what you might understand as the property’s “Rates.”

It is not uncommon that for people to either be unaware of the requirement to file a Non Residents annual tax return, or, if they are, to be in willful violation of the requirement.  If it is caught by the Spanish taxing authorities, the owner will be required to pay taxes on the last four years of taxes along with a probable significant fine.  This will also be the case if the property needs to be sold and taxes have not been filed in recent years. The taxes, along with any fines, will need to be paid before the property can legally be transferred.

You should likewise be aware that a capital gains tax will apply to any profit earned as the result of the sale of your Spanish property. This is the difference between what you paid for your property and what you have now sold it for.  Currently, in Spain, the capital gains tax rates vary between 19 and 23 percent.  For this reason, you may want to consider whether it is cost effective to purchase a property rather than rent if you only plan to hold onto the home for a short period of time.

Spain is a beautiful country and a wonderful place to spend your holiday time.  The informed buyer should have no trouble safely securing a property to enjoy for years to come.  Everything discussed here should present no problems for the qualified attorney.  If you have any questions about the process of purchasing a property in Spain please call us to speak with one of our expert advisers.

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