Capital Gains Tax Exemption on a Gift of the Main Home

Capital gains tax exemption on the gift of a main home

Capital gain or loss on a gift

Giving away a property gives rise to a capital gain or loss because it changes the composition and value of the taxpayer’s assets. This follows from Article 33(1) of Law 35/2006 of 28 November on Personal Income Tax and the partial amendment of the Corporate Tax, Non-Resident Income Tax and Wealth Tax Acts (Official State Gazette of 29 November; hereinafter, the PIT Act). The gain or loss is therefore subject to tax under Article 6(1).

The gain or loss is calculated as the difference between the acquisition and transfer values under Article 34 of the PIT Act. Articles 35 and 36 define those values for transfers for consideration and transfers for no consideration, respectively.

Article 35 provides:

“1. The acquisition value consists of the sum of:

(a) The actual amount paid for the acquisition.

(b) The cost of investments and improvements made to the acquired assets, and the expenses and taxes inherent in the acquisition, excluding interest, paid by the purchaser.

Under the conditions laid down in the regulations, this value shall be reduced by the amount of depreciation.

2. The transfer value shall be the actual amount for which the disposal took place. The expenses and taxes referred to in point (b) of paragraph 1 shall be deducted insofar as they were paid by the transferor.

The actual disposal value shall be the amount effectively paid, provided that it is not lower than the normal market value; if it is lower, the market value shall prevail.”

Article 36 states:

“Where an acquisition or transfer is made for no consideration, the rules in the preceding article shall apply. The actual values shall be those determined under the Inheritance and Gift Tax rules, up to the market value.”

The Ninth Transitional Provision of the PIT Act also establishes a transitional regime for capital gains from the transfer of assets not used in an economic activity, or removed from such an activity more than three years before the transfer, where the assets were acquired before 31 December 1994.

The transitional regime provides a reduction for the part of the gain generated before 20 January 2006. This is the proportion attributable to the days from the acquisition date through 19 January 2006, inclusive, compared with the total number of days the asset remained in the taxpayer’s estate.

Gift of the main home

If the property gifted is the taxpayer’s main home and the transaction gives rise to a capital gain within the meaning of Article 33 of the PIT Act, Article 33(4)(b) exempts gains realised on the transfer of a main home by persons over 65 or by persons in a situation of severe or very severe dependency under the Personal Autonomy and Care for Dependent Persons Act.

Main home is defined in Additional Provision Twenty-Three of the PIT Act and, in more detail, in Article 41 bis of the Personal Income Tax Regulations, approved by Royal Decree 439/2007 of 30 March (Official State Gazette of 31 March; hereinafter, the Regulations):

“1. For the purposes of Articles 7(t), 33(4)(b) and 38 of the PIT Act, a taxpayer’s main home is the building that has been their residence for a continuous period of at least three years.

However, the home will be treated as the taxpayer’s main home even if that period has not elapsed when the taxpayer dies or other circumstances necessarily require a change of address, such as marriage, marital separation, a transfer at work, obtaining a first job or changing jobs, or other duly justified similar circumstances. (…)

3. Solely for the exemptions under Articles 33(4)(b) and 38 of the PIT Act, the taxpayer is considered to be transferring their main home if, under this article, the property is their main home at that time or was so at any time during the two years before the transfer.”

Whether a particular property is the taxpayer’s residence is a question of fact. It may be established by any evidence admissible in law under Articles 105 and 106 of General Tax Law 58/2003 of 17 December. The Directorate-General for Taxation does not assess that evidence; this is for the Tax Agency’s management and inspection bodies.

Conclusion

The exemption under Article 33(4)(b) of the PIT Act applies to any capital gain arising from a gift if both conditions are met: the donated property is the taxpayer’s main home as defined above, and the donor is over 65 or is in a situation of severe or very severe dependency under the Personal Autonomy and Care for Dependent Persons Act. If these requirements are not met, the exemption does not apply and the gain is subject to tax.