How will the new municipal capital gains tax work?
What is the capital gains tax?
First of all, it is important to bear in mind that the municipal capital gains tax is one of the taxes that has brought in the most revenue for local councils since it came into force in 2004. It is second only to the Real Estate Tax (IBI) in terms of volume collected.
The tax is created as a tax obligation to be paid by the taxpayer who sells, inherits or receives a property as a donation, and is levied on the part of the profit obtained. The problem, and what has given rise to what seems to be a definitive change in its application, is when in a sale and purchase transaction there is no real capital gain.
In light of the evolution of the real estate market in recent years, both in Madrid, such as the northern area, la Moraleja, el Encinar and Ciudalcampo, the Constitutional already determined in two rulings in 2017 and 2019 that the tax could not be demanded in the event of a loss in the transfer or if its amount exceeded the actual gain obtained by the taxpayer.
Since its inception, the application of this tax has been very controversial precisely because it ignores the economic reality of real estate transactions.
The Constitutional Court declared this tax illegal last October 26 and the Council of Ministers has just approved the Royal Decree-Law that modifies the way it is calculated in order to adapt it to this ruling.
This new regulation seeks to ensure that capital gains tax is paid only when there is a real gain in the case of the sale or transfer of a property.
Although there is a great controversy about the before and after with respect to the decision of the Constitutional Court, in principle, if a taxpayer sells a house in losses, he will not have to pay from November 10, not applying any type of tables as it was being done to date.
The regulation emphasizes its non-retroactive nature, something that is also controversial and certainly debatable.
What is the new tax like?
The new regulation, which breaks with the compulsory nature of the application of the tax (and consequent payment) regardless of the profit (or loss) obtained from a real estate transfer, proposes two ways of calculating the tax:
1. Real formula: the difference between the sale or transfer price and the purchase price of the property will be calculated.
2. Objective formula: it will be calculated by multiplying the cadastral value of the property with new coefficients that will be approved each year and that will evolve depending on the real estate market.
If the buyer of the property can demonstrate that the real capital gain is lower than the result of the objective formula, the real one can be used.
The buyer will always be able to decide which formula to use depending on the one that suits him best.
In any case, and this is probably the most important aspect of the new rule, the tax will not have to be paid if there is no gain.
How do the coefficients change?
The maximum coefficients that the Treasury has established for the tax are ceilings that the municipalities can modulate and that will be revised every year to adapt to the evolution of the market. A coefficient has also been introduced for transfers carried out in a period of less than one year, which are usually the most speculative and were not previously taxed by the tax.
And the taxable base?
The taxable base of the tax will be the result of the multiplication of the land registry value at the time of the transfer by the coefficients fixed by the mayors and which may not exceed the state ceilings.
It is possible to find the value in the cadastral reference of the property and sometimes it is reflected in some mortgages. The tax will be determined on the revaluation of the land.
Who wins and who loses?
The new system weighs more in the operations in the short term, but benefits when the operation is in the long term.
Although the fact that the final positive or negative result of the sale of a property will now be taken into account, many owners complain that years ago they lost with the sale of a property because when they sold it they had to pay a capital gain even though they sold it below the price at which they bought it.
This fact together with the non-retroactivity of the repeal of the previous tax is highly controversial and will undoubtedly give rise to a large number of claims.
In this situation we suggest as always a good legal advice that covers all aspects related to the sale of a property to avoid any problems.