A taxpayer buys a home (Home 1) using a mortgage loan, intending to use it as their main home. After purchasing Home 1, they sell their former main home (Home 2).
Would the gain on Home 2 be exempt from Personal Income Tax if the taxpayer reinvests all the proceeds in repaying the mortgage taken out to buy Home 1?
The case described qualifies for the main-home reinvestment exemption under the criterion adopted by the Directorate-General for Taxation (DGT) in binding ruling V0710-07. In a similar case, the DGT recognised the exemption where the proceeds from selling the first home were used to cover payments already made and to repay early the loan used to finance the second home. The exemption applies to the amount of the proceeds used to pay the outstanding price of the new home within two years of the sale of the former home.
Accordingly, where a taxpayer buys a new main home with borrowed funds and later sells the home that had previously been their main home, the amounts from the sale used within the following two years to repay the loan secured on the new main home may qualify for the reinvestment exemption.
This interpretation therefore applies to the case described: the taxpayer first acquired one home and later bought the second using external financing obtained through a mortgage. They then sold the first home and used all the proceeds to make an early repayment of that mortgage.
The DGT reached this conclusion by reference to Article 39(1) and (2) of the regulations governing the tax, approved by Royal Decree 1775/2004 of 30 July, which provided:
Exemption for reinvestment in a main home
1. Capital gains realised on the transfer of a taxpayer’s main home may be exempt where the full amount obtained is reinvested in acquiring a new main home, subject to the conditions laid down in this article. If the taxpayer used borrowed funds to acquire the home being transferred, solely for these purposes the full amount obtained is the transfer value less the outstanding principal of the loan at the time of the transfer…
2. The proceeds from the disposal must be reinvested, in one or more transactions, within a period not exceeding two years. The exemption also applies to proceeds from a disposal used to pay the price of a new main home acquired during the two years before that disposal. The requirements of this provision were met by making an early repayment of the loan with the money received from the sale.
The case described is consistent with the DGT’s interpretation.
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