What about the profit tax on the sale of real estate.

Many owners in Mallorca have acquired their properties years ago at a very low notarially determined purchase price compared to today’s market values. Correspondingly high is then the profit tax resulting from the sale of the property. All those sellers who bought their property before 1994 can claim a reduction of the profit tax.

Before some tax-relevant remarks on the sale of real estate in Mallorca: Assessment basis for the state profit tax is the difference between the transfer value and the acquisition value of the property. The acquisition value results from the last notarial deed. This can be a notarised purchase agreement, an inheritance or gift deed or a purchase of company shares. The acquisition value is the amount for which the property was acquired, plus the costs and taxes associated with the purchase.

Typical taxes are “transfer taxes” (abbreviated to “ITP” in Spanish) or inheritance taxes, as well as notary, lawyer and land registry fees. The tax type “ITP” is often referred to as the land transfer tax, but this is actually not quite correct, as the corresponding law also taxes the transfer of movables (such as cars). In principle, all investments made in the property that increase the value of the property can be deducted. An example is the addition of an extra bedroom and bathroom with a municipal building permit. Measures that merely serve to make the property more homely (e.g. PVC windows instead of wooden windows) are not recognised by the tax authorities as upgrading.

The transfer value is the amount for which the property is now sold, less the costs and taxes associated with the transfer, which are borne by the seller. These are mainly the municipal increment value tax (so-called “plusvalia”), lawyer’s fees and any broker’s commission that may be incurred.
Until 2006, there was a valuation standard which reduced the profit achieved by 11 % per year from the third year onwards, depending on the number of years elapsed between the acquisition and the transfer. This tax concession continues to exist in the period up to 2006 for all properties acquired before 1994, although a concession limit of €400,000 has been set by the tax legislator.

By way of illustration, a practical case: a non-resident client sells his apartment in Ibiza on 2 September 2019 for €170,000. He had the property on 10 January 1985 for just under €6,000. The seller had had the property renovated 20 years ago, but the corresponding invoices can no longer be found. For the period from 10 January 1985 to 19 January 2006 (21 years) the profit tax can be reduced considerably. The period from 2006 to 2 September 2019 (13 years) is taxed with a profit tax of 19%.
The calculation example then produces the following result: The transfer value is € 170,000. From this amount € 6,000 can be deducted as acquisition value. The basis for calculating the profit tax is therefore an amount of €164,000. Since the reduction rule is applied for the years from 1985 to 2006, the profit tax in our case is only about €12,000, which is a considerable advantage (a difference of €19,000) compared to the full tax rate of 19% (about €31,000). As the case study clearly shows, before offering their property for sale, all owners should have a specialist clarify beforehand how much profit tax is likely to be payable on a sale.