How to Save 86% Property Transfer Taxes, Legally.
There can be many reasons for wanting to end the joint ownership of a property, with two of the most common being as a result of divorce or choice of inheritors. If proceeded in the normal way, that will be treated as a sale by one owner and purchase by the other owner of the property, and the taxes and expenses can be high. However, there is a special legal procedure that can be followed in Spain to re-arrange property holdings, which saves buyers a considerable amount in taxes and can be arranged within a short time, providing both parties agree to it.
On buying resale property in Spain, a buyer is normally subject to 8% Property Transfer Tax (ITP), or even more, on the sales proceeds. However, on following what is known as a ‘Dissolution of Joint Property Ownership’ (or DJPO, for short) a buyer has to pay only 1.5% Stamp Duty. In plain English, this procedure can save you 86% in tax, or more.
A Dissolution of Joint Property Ownership enables the outgoing joint owner to transfer their share to an existing co-owner, legally waiving the high Property Transfer Tax, and paying instead only 1.5% Stamp Duty (or less, depending upon which area of Spain the property lies).
To benefit from a DJPO
- Both buyer and seller must be pre-existing owners of a property e.g. a married couple who own a property under joint names, or joint inheritors.
- One of them wants ‘out’ and to sell his/her share to the other joint owner.
- Both buyer and seller must agree to the value of the property, perhaps having Survey Spain provide an independent current market valuation.
- If there is an outstanding mortgage on the property, a lender’s permission may be required to release the outgoing borrower/owner from his/her commitments.
As a result, a DJPO is suitable for:
- A divorce or separation – Couples owning property jointly may decide to split up, with one of the couple wanting to keep the property and buying the ex-partner’s share.
- Re-arranging inheritances – If one or more of the inheritors wants money instead of a share of the property, the other inheritor(s) can buy their share.
- Re-arranging property holdings between family and friends – Family, friends or investors co-owning a property may decide to re-arrange their holdings when some will buy the shares of the ownership of the others.
As always, both Buyer and Seller have to pay taxes and expenses on transferring ownership.
- 1.5% Stamp Duty (or less) on the price of the share.
- Capital Gains Tax on the outgoing share. If the seller is non-resident in Spain, 3% of the price must be sent to the Tax authorities by the Buyer, in case the seller doesn’t pay the CGT. This may be recoverable if the tax amount is less.
- In addition, there are Lawyer’s, Notary’s and Land Registry Fees, that can be paid by agreement between the two parties.
What happens if one of the joint owners wants to sell the property, but the co-owner, for whatever reason, may not want to, but also refuses to buy him/her out. It’s an impasse.
To bypass this, any joint owner is entitled to force a DJPO through a law court. The court will overrule any dissent and the asset will be disposed of regardless of opposition from fellow co-owners, by being auctioned off publicly to the highest bidder.
Obviously, this is a last resort as all joint owners could lose significantly if the auction doesn’t raise the market value, plus all the costs.
This is a summary of an article provided by Larrain Nesbitt Lawyers, in Marbella, Spain. www.larrainnesbitt.com