Why you need a tax expert when buying property in Madrid

This article explains why you need a tax expert when buying property in Madrid, explains the different taxes that must be paid and tells you how you can pay 30 to 50% fewer taxes on your Madrid property investment.

Why you need a tax expert when buying property in Madrid

Buying property in Madrid is a very transparent process if you are familiar with the procedures. However, if you are not familiar with the process and try to purchase the property on your own, you could end up:

  1. Neglecting to pay taxes and thus incurring fees.
  2. Paying more in taxes than necessary.

The taxes you need to pay

Taxes are assessed differently on second hand property purchases versus purchasing a new build.

New Builds

VAT (Called IVA in Spain)

This is equivalent to 10% of the final purchase price of your property.

Impuestos de Actos Juridicos Documentados (IAJD)

This is the Spanish equivalent of a stamp tax. This covers the legal work done by the local government to buy the property. It ranges anywhere from 0.4% to 1.0%. The official tax code states the amount to be:

  1. Official protection housing and public protection housing that meet the established conditions: exempt.
  2. Public protection homes of equal or less than 90m2 that do not meet the requirements: 0.2%.
  3. Public protection housing with more than 90m2 and free housing with deed value greater than €120,000: 0.4%.
  4. Public protection housing with more than 90m2 and free housing with deed value greater than €180,000: 0.75%.
  5. First copies of deeds and notarial deeds documenting property transfers with express waiver of VAT exemption: 1.5%.
  6. Documents of constitution and modification of the guarantee rights in favor of reciprocal guarantee companies domiciled in the Community of Madrid: 0.1%.

Clearly, the above is inscrutable to the average person, which is why we recommend you contact a tax expert when buying property in Madrid.

Second hand properties

Impuestos de Traspasos Patrimoniales (ITP)

This is a property transfer tax. It is the equivalent of VAT, imposed upon second hand properties. In Madrid, it amounts to 6% of the property purchase price. Note that it is higher in other places in Spain, so if you do an internet search and see what appears to be conflicting evidence, this is likely the reason.

 

Working with a tax expert can save you up to 50% on taxes associated with your Madrid property purchase.

Taxes assessed on both new builds and second hand properties

Impuesto sobre la Renta de No Residentes (IRNR)

This is the income tax for people that are not residents in Spain. It is a direct tax levied on the income they earn in Spain. It amounts to 24.75% of gross income, such as rental income.

Impuesto sobre el Patrimonio (IP)

This is a wealth tax. For non residents, there is no floor on this tax. It is a percentage of the value of the property. The value of the property is the highest of the following three values:

  1. The cadastral value of the property
  2. The value of the property determined by tax authorities for the purposes of liquidating other taxes
  3. The acquisition value of the property, after deducting liabilities and encumbrances that may be charged to the real property.

Generally, it is 0.2%-2.5% of the value of the property. This is another reason you need a tax expert when buying property in Madrid: they can help you calculate this rate.

How to avoid over paying your Spanish taxes

Spanish residents are taxed differently than non residents. As discussed above, non residents pay income taxes amounting to 24.75% of gross income. Furthermore, non-Spanish residents cannot deduct costs associated with owning and renting a property from their taxes. Finally, for Spanish residents, there is a floor on the wealth tax assessed. Meaning, Spanish residents do not pay a wealth tax unless their assets are €700,000 or more.

There is an entirely legal way for non residents to get around paying these additional taxes, but they need a Spanish tax expert to help them do it: they can set-up a Spanish company.

If you are a non-European national you can pay 30 to 50% fewer taxes on your Madrid property investment by setting up a Spanish company. You go from a tax rate of 25% of gross revenues to 10-15% of gross revenues. This means your investment can be up to 20% more profitable, particularly if you have a long-term investment strategy.

Do you want to enlist the help of a Spanish tax expert when buying property in Madrid? If so, arrange a FREE CONSULTATION WITH US and we can connect you with one of our partners.

 

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