What costs does the seller bear when selling a property in the Balearic Islands?

If a resident or non-resident sells their Spanish property in Ibiza, this may mean that they have made a capital gain and a capital appreciation, both of which are taxable.

In principle, the seller is subject to the municipal capital gains tax (“Plusvalía municipal”), unless otherwise agreed between buyer and seller.

However, according to the latest case law, such an agreement is only valid under certain conditions. In addition, the seller must pay tax on the capital gain from the sale of his or her real estate between the time of purchase and sale (“state capital gains tax”) if he or she receives a financial benefit as a result.

This is treated as income in the Income Tax Act (IRPF) and added to his or her other income.

This means that a distinction must be made between two completely different taxes when taxing the appreciation or capital gains of real estate:

– The state income tax, which taxes the capital gains of land and – if any – buildings constructed on it

– The municipal ‘Plusvalia’, which taxes the increase in value of urban land without taking existing buildings into account

As a result of the tax concessions for acquisitions made before 31 December 1986, the longer the acquisition is made, the lower the tax on the capital gain. In the case of Plusvalia, on the other hand, the longer the transferor was the owner of the property, the higher the tax is, whereby only the last twenty years are taken into account.

Spanish (state) profit tax

With regard to the state profit tax, a distinction must be made between residents and non-residents. For non-residents in the Balearic Islands, the current tax rate on capital gains has been a uniform 19% since the beginning of 2016.

If a non-resident transfers a property located in the Balearic Islands, the buyer is obliged to withhold an amount equal to 3% of the notarised purchase price and pay it to the tax office within one month of the notarisation of the purchase contract using the appropriate form in the seller’s favour, and then hand over the corresponding proof to the seller. If the seller has not made a profit on the sale, the tax office will reimburse the seller on request the amount paid in or a partial amount after deduction of possible tax debts.

Municipal Capital Gains Tax – “Plusvalía municipal

As a general rule, any transfer of urban land subject to property tax (IBI) is taxed with the tax on the increase in value of urban land, the “Impuesto sobre el Incremento del Valor de los Terrenos de Naturaleza Urbana”, colloquially called Plusvalia.
The tax is based on the increase in value of urban land.

This means that when you buy a built-up plot of land, buildings are not included, only the land itself. The tax is based on the actual increase in value during the last twenty years before the transfer. The calculation of the exact amount of the Plusvalia tax prepared by the municipal administration is based on the so-called “Valor catastral”, the cadastral value. The cadastral value can be taken from the respective property tax assessment of the previous year.

The notaries are obliged to provide the competent municipal administration with a list of all public deeds they have notarised, insofar as these contain legal transactions relevant to the Plusvalía tax.  Without the corresponding application of the buyer or seller side to the municipality for the calculation of the Plusvalia, the competent land registry office will not register the new owner at present.

If the seller of the real estate is a non-resident, the municipality can apply directly to the buyer of the real estate when collecting the Plusvalía tax. As a result of this legal situation, municipalities can hold the purchaser liable, even if the purchaser was not explicitly obliged to pay the tax in the notarised deed of purchase.