While Spain does not restrict the acquisition of Spanish real estate by foreigners, Spanish tax law has provisions similar to those in France which make it more difficult and as a consequence more expensive to hold real estate in a tax efficient way.
Buying Process
- You will need to obtain an N.I.E. Number (Numero de Identidad de Extranjeros). This is required if you need to open a Spanish bank account along with contracting services (eg telephone) and utilities and dealing with the national and local tax authorities. The easiest way to obtain one is to give power of attorney to a trusted solicitor in Spain who will make the necessary applications while you go about the business of home hunting
- Once the buyer’s solicitor has completed the initial land registry checks and all is seemingly in order with the vendor’s right to sell etc., the contract of sale and purchase is signed by both the vendor and the purchaser and a deposit of around 10% is paid to the vendor. Ideally this contract should not be signed if the buyer’s solicitor cannot provide a written statement that the land registry has been thoroughly checked by him and that there are no outstanding mortgages or unpaid debts against the property for sale
- For those buying off plan in Spain or purchasing a home during construction it is essential that the constructor supplies the investor with a copy of their bank bond or the insurance cover that protects the purchaser in the event that the builder cannot complete the property. In the unlikely event that this happens then the buyer will be refunded their monies plus interest and the buyer must see the original and be in receipt of a copy of the bond or insurance certificate before they pay any form of deposit. Furthermore the contract of sale and purchase must comprehensively and in a s much detail as possible list and describe the specifics of the property being purchased – from describing the internal and external measurements, the quality of included fixtures and fittings, the finish in the garden, layout of the rooms etc.
- Finally, before we move onto the completion stages of the process to buy property in Spain it is imperative to mention that the buyer’s solicitor also has to make sure that the property that is being marketed for sale is exactly as detailed in the title deeds and that within the sale and purchase contract there is a detailed record of the boundaries of the property for sale etc. Furthermore, if the property is new or less than ten years old then the ten year post build insurance policy that all new houses should have has to be assigned to the new buyer and this assignment should be mentioned in the contract.
Upon completion buyer, seller, both parties’ lawyers and a bank representative if the buyer is using a mortgage visit a public notary’s office. Final contracts are signed, monies and title deeds transferred.
- The property must state that it has been registered as a “Vivienda”, meaning the property has been registered as a ‘habitable dwelling’, been built over five years ago and the local council are willing issue a “certificado de exencion de infraccion urbanistica”.
- It is important you find out the date the property will be registered in your name(s) as the bank cannot lend on the security until registration of the property has been completed
- Make sure you contact your lender if the “Nota Simple” states that the property in Spain is ‘Rustico or Rustica’, ie normally in rural areas as it can affect your entitlement to a mortgage.
- Independent legal advice is highly recommended, particularly before signing the Sales Contract or paying a deposit
- You should check with your Spanish Lawyer (Notaire) or Estate Agent that the costs charged by Legal and Government Authorities are fully clarified. The lawyer may also include within his charges costs for assigning the Australian mortgage.
- On completion you must ensure you will have full title to the Spanish property. You also need to make sure that the “Nota Simple” is available for the lender as it is required before a valuation can be carried out. The “Nota Simple” is the document that confirms the legal registration of the property.
- Completion of the property takes place in front of an appointed Spanish notary and all parties to the mortgage including the vendor (or power of attorney including official copy), lawyers and representatives of the lender
Costs
In terms of the additional costs associated with buying investment property in Spain they vary depending on the type of property the individual is interested in. New properties attract 7% VAT plus 1% stamp duty, older resale properties only attract the 7% VAT and those buying land are faced with 16% VAT plus the 1% stamp duty. On top of this there are lawyer and notary fees, land registry fees and if using a mortgage there can be a percentage payable in setup and arrangement costs. Those buying property in Spain as opposed to land should allow for 10% in addition to their purchase price and those buying land should allow an additional 20% to be safe.
Finally, new rules relating to capital gains tax and the withholding provision paid by non-residents when buying property in Spain were approved by the Spanish Senate in 2006 and from 2007 non-residents will pay a maximum of 18% CGT on property resales and the withholding provision they pay when selling drops from 5% to 3%.
Taxation Issues
As in other countries, there is an unavoidable annual tax on real estate ownership, based on the cadastral value, which is normally far below the market. The rate of tax amounts to approximately 0.3% for rural real estate and 0.4% for urban real estate, but local authorities may increase this tax rate up to a certain maximum determined by law. In addition to the local real estate tax, other taxes on ownership are levied, the nature of which varies depending on whether the owner is an individual or a company
If the owner is a non-resident individual, both wealth tax and personal income tax are levied on the real estate. Wealth tax is levied on the value of assets situated in Spain, the tax rate is progressive and varies from 0.2% up to 2.5%. If the real estate is privately used by an individual owner, a tax of 25% of 2% of the cadastral value of the real estate is payable on the owner’s deemed income
International Private Law
Unlike the situation in France, Spanish international private law allows a foreigner’s home law to be applied even on Spanish real estate. This makes life easier with regard to inheritance planning involving real estate in Spain, but Spanish inheritance taxes are applicable in any case. It is also nevertheless advisable to make a Spanish will applicable to the Spanish estate. While a foreign will is recognised it may lead to delays and prove more costly in the long run
Residence For Tax Purposes
While the rules on tax residence used to be relatively lax, they have now been tightened up. Persons who maintain their habitual residence in Spain by staying in Spain longer than 183 days during any calendar year are deemed resident for tax purposes. Any absences during a prolonged stay are counted together, so it is now very easy to qualify under the 183 day rule. Alternatively, one is deemed resident for tax purposes if the centre of one’s vital interests or professional activities can be found to be in Spain. It is also worth mentioning that in the absence of proof to the contrary, it is presumed that a person has his habitual residence in Spain when his or her spouse and his or her minor children are habitual residents there
Investment Potential
For those interested in targeting residential property it is possible to derive an income from Spanish property, it is also possible to flip properties and collect short term gains or to resell them for maximum profit in the medium term. Those looking to derive an income from the letting of residential property have two main markets to utilise – the tourism market in and around the main beach resorts and the professional market in Spain’s industrialized North.
The other main residential market where investors can derive an income is in the main employment centres in Spain. High employment towns and cities such as Barcelona have a massive market demand for central or well located apartments which are furnished to a good standard and which can be corporate let for maximum gains or privately let for a good rate of monthly income. An aside to this market is of course the student market. In university cities in Spain there is a strong annual demand from national and international students for cheap accommodation – such accommodation is usually in the form of flats with basic amenities and cost effective furnishing.
Again, all of these options are possible with finance and as long as an investor works out how much they will realistically rent their property for and that this amount will more than cover their repayment commitments they stand to make a good long term capital gain.
The good thing about buying in a tried and tested market like Spain’s is that with so much historical data available about the property market cycle, even those who inadvertently buy before a drop in prices can make a healthy profit if they are prepared and able to ride out the downward trend in the market - the everlasting and intensifying appeal of Spain means that there will probably always be another upward swing in fortunes.
Interested?
