Second homers warned of property tax trap

Expats snapping up bargain price homes in Spain are often paying too much tax because prices are going down faster than local authorities can recalculate values on their computer systems.

The problem affects second home buyers and expats purchasing pre-lived in homes, not new builds.

In Spain, the buyer pays ITP tax – patrimonial transference tax – on the value of the property.

The rate varies between the country’s autonomous communities, so a buyer in Madrid would pay 7% tax, while another buyer in Valencia would pay 10%.

The problem comes with recording the value of the home.

Price conflict

The public deeds will lodge the price the buyer paid, but the local authority database will have an administrative value.

In the past, the two values have had little conflict because property prices were not changing as rapidly as they are in the current market.

Homes in Spain have lost around 40% to 50% of their value since the property bubble burst in 2008 and administrators have struggled to keep up with maintaining their data.

The worst affected buyers are those who have found cheap flats, because the pricing gap is wider between the amount paid and the administrative value applied by the local authority.

“The problem we are seeing is some autonomous communities have a minimum property price and then calculate a minimum ITP payment based on that figure,” said Spanish lawyer Daniel Talavera, who specialises in these cases.

Extra tax

“If the local authority believes the sale price is not high enough, they will want to charge extra tax on top of that the buyer paid as due.”

Talavera suggests that anyone buying a second home in Spain should discuss the likely ITP due with the regional authority (Comunidad Autonoma) so they are ready for the tax bill.

If a tax claim comes, the buyer can end up paying the 10% ITP then – the difference between the price paid for the home and the administrative value placed on the property by the local authority.

The tax bill is also likely to carry a late payment penalty and interest charge.

Talavera gives the example of buying a property for 200,000 euros. The ITP bill at 10% is 20,000 euros, but if the local authority has a value of 300,000 euros against the property, they were expecting an ITP payment of 30,000 euros, so demand the difference of 10,000 euros plus interest.

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