In the event of selling a dwelling, we could add the costs of the renovation(s) the property has undergone to the price we paid for our premises in order to calculate the capital gains and subsequent taxes related. However, and from recent times, the Spanish Tax Office, Hacienda, has changed its view from the one they had so far, and the change consists in a continual and systematic denial of the possibility of adding the costs of the renovation works to the final value of the premises and this done via verification of the recent fiscal years and inspections, resulting in the mentioned denial of the taxes to pay by adding the costs of the renovation works to the final Price of the dwelling hence achieving a reduction of the amount to pay in terms of Plusvalía (capital gains).

Notwithstanding the change in the approach of the Spanish Tax Office to the resolution of the requests to include the costs of renovations as a part of the total value of the premises, we are now explaining what the Spanish Law rules regarding this particular scenario.

The Tribunal Económico-Administrativo Central (TEAC in Spanish standing for Central Economic and Administrative Court), in a 2023 legal ruling, remembers the doctrine used by the Tax General Directorate regarding what can be considered Improvement Works and what can be understood as Renovation or Refurbishment. The important issue here is that only the latest are entitled to enhance the purchase amount, hence enabling that in a future sale the capital gains tax to pay will be lower.

We allow ourselves to remind you that Capital Gains pay taxes on a fixed rate depending the sale figures (19%, 21%, 23% o 26%) and that it is calculated finding the difference between purchasing and selling value.

What can be considered an investment and/or an improvement in order to be entitled to a discount on the taxes to pay

As per the Spanish Tax Office, “Enlargement or improvement Works need to be understood as real investments which result in an increase of the life cycle or the habitability of the premises, or in an increase of the extension or capacity in other type of goods, as it is considered in the Plan General Contable (General Chart of Accounts), stating that those costs in improvement or enlargement of the fixed assets are the ones to be taken into account, regarding PIT (personal income tax), as a bigger amount on the price of purchasing.”.

Thus, the TEAC, in its resolution dated September the 26th, 2024, allows the consideration of investment and improvement Works those that, as per the VAT law, are renovation Works and therefore are levied with the reduced 10%.

Hence, the following Works are to be admitted as investment and/or improvement:

  • Renovation Works in which over the 50% of the total costs corresponds to consolidation or structural item treatment, façades, roofing or either similar building Works or related to renovation/refurbishment.
  • Works that its total costs exceeds the 25% of the premises purchasing price (if the purchase took place within the two previous years of the acquisition) or 25% of the market value of the premises before the renovation Works, deducting in both examples the current value of land.
  • Structural adaptation Works in order to guarantee the building stability. Eg. Foundation adaptation Works, as well as those affected or consisting in pillar or slab adaptation; enlargement of the built Surface, over and down the floor; rebuilding of façades and internal yards; elevation systems introduction, included those aimed to sort the architectural barriers for handicapped people. (Some authorized voices warn that for the Tax Office only enlargement of habitability space Works are considered building Works, no so the interior refurbish Works).
  • Building Works connected to rehabilitation works: building, plumbing, carpentry Works aimed to improve and adapt the closures, electrical installation, water and heating and cooling, fire protection Works and energy restoration Works

 

It is advisable to properly document the building Works via quotations and duly explained projects, in which there shall be stated the renovation nature of the Works in comparison with the original premises condition.

It is also advisable to avoid general concepts in the invoices and quotations, trying to describe the level of improvement to the premises from the initial condition the Works have accomplished, as well as the increase of productivity of the building in comparison with the productivity existing before the works.

Last, but not least, in the event of Works involving demolition of walls previously to the construction works, rearranging the existing rooms/spaces,  the improvements should focus on the increase of the number of rooms, bathrooms, or even the creation of spaces that didn’t exist before the Works (Eg. Bigger kitchen, bedrooms or bathrooms).

Regarding the procedures, we should pay attention to the paths we can follow when we are required by the tax office.

  • Once started the assessment of the figures paid to the Tax Office, we have the right to answer during the period allowed for submissions to try and prove the Works performed and that they fit in the casuistry and therefore no settlement needed.
  • If despite the intents to prove the Works done and that they fit in the scope of the examples provided, we could still present a formal appeal to the same Tax Office, or address our query directly to the competent Regional Tax Appeal Board. Furthermore, should our query be disdained by the Appeal Board, we could still elevate the issue to the Higher Justice Courts.

 

We at Marbella 360 will be delighted to talk about this topic or any other topic, clearing up any doubts in order to help our customers to acquire a position where they can deal with the sale/purchase of their property with all the information needed and positively no “shady spots”.