Tax Return: Applying the Main-Home Reinvestment Exemption

By: Josep Navarro

Exemption for reinvestment in a main home

Capital gains realised on the transfer of a taxpayer’s main home may be exempt if the full amount obtained is reinvested, in one or more transactions, within no more than two years from the date of transfer, in acquiring a new main home.

The exemption may also apply where the proceeds from the sale are used to pay for a new main home acquired during the two years before the transfer. In that case, to determine whether the capital gain is fully or partially exempt, the reinvested amount includes both sums used to repay the loan taken out to finance the new home and amounts already invested in that home and available to the taxpayer before the former home was transferred. The period between acquisition of the new main home and disposal of the former one must not exceed two years, calculated from date to date.

External financing

If the taxpayer used borrowed funds to acquire the home being transferred, solely for these purposes the total amount obtained is the transfer value less the principal of the loan still outstanding at the time of transfer.

For these purposes, renovation of a home is treated as its acquisition under the terms of Article 41 of the Regulations.

Definition of a main home

Whether a home qualifies as the taxpayer’s main home is determined under Article 41 bis of the Regulations. In particular:

The building must have been the taxpayer’s residence for a continuous period of at least three years. It will still be treated as the taxpayer’s main home if that period has not elapsed when the taxpayer dies or circumstances arise that necessarily require a change of address.

The property will not qualify as a main home if, after 12 months from its acquisition or completion of works, the taxpayer has not actually and permanently occupied it, unless:

the taxpayer dies or other circumstances necessarily prevent occupancy, as provided in Article 54(1) of the Personal Income Tax Regulations; or

the taxpayer is entitled to live in a home because of their position or employment and the property is not put to any other use. In that case, the period begins when the position or employment ends.