Legal formalities & expenses when purchasing real estate in Spain
It is generally recommended that buyers of real estate in Spain instruct a qualified lawyer to represent them and hire a financial advisor knowledgeable in local and international taxes and dues to take care of the tax aspects. Spain does meanwhile provide a relatively high amount of legal protection for real estate purchases, but there are still cases in which the buyer has to battle enormous problems or unexpected expenses after the acquisition because certain processes were not adhered to, documents weren't checked or contracts were drafted which include substantial disadvantages for the buyer. It still happens more often than not that acquired objects or extensions have to be dismantled because renovations or extensions were not properly authorised or the authorisation was not registered with the different agencies involved. Subsequent permits are possible in some cases, but they do require a special process and incur substantial expenses.
Frequent mistakes in real estate purchase deals in Spain
- The buyer is burdened with taxes although these must be borne by the seller.
- Confusion of foreign and Spanish marital property regime when spouses buy real estate.
- Lack of declarations and research of the property being free from all liens and encumbrances.
- Mortgage liens are not discharged at the same time of the transfer of ownership and remain as a lien on the property.
- Erroneous assumptions about alleged tax relief when acquiring a company (S.L.) which owns the real estate.
- Hidden or unintended exclusions of warranty which make it unable for the buyer to claim defects later.
- No tax representation in Spain is referred to although it is obligatory for non-residents in Spain, both for the seller and the buyer of the property. A lack of tax representation may have serious consequences. If the Spanish fiscal authorities cannot serve official documents, they become effective and enforceable through public notice without any possibility of appeal. This may even lead the seizing of the property or the garnishing of foreign bank accounts by the Spanish fiscal authorities with the help of administrative cooperation.
- Obligatory energy pass and certificate of habitability are not provided.
- The certificate of the owners' association about payments made is not provided.
- Agreements on payment in instalments do not lead to retention of ownership if the purchase price is not paid. The ownership is transferred to the buyer after the notarization and the registration.
- Disregard of pre-emption rights of tenants, governments, neighbours or co-owners.
In order to protect yourself against negative surprises, like mistakes in the permission process or enormous tax bills which might encumber an object, we must stress the importance to perform a careful audit before each purchase. Not only the authenticity of all documents will be examined, but all remaining liens and encumbrances will be investigated and future risks will be evaluated.
With the experience of more than 1000 real estate transactions under our watch, De Micco & Friends guarantee you a secure and optimised purchasing process in Spain. We accompany you from the conclusion of a letter of intent (purchase option) all the way to the drafting of contracts, the notarization and to the payment of the purchase price and the definitive discharge of existing mortgages. If you plan to have the acquisition financed in full or in part by a bank, we will also be able to help with our advice and our connections.
The purchasing process
Buying real estate in Spain is a relatively quick process. Like in many other countries, the final authority regarding the transfer of ownership of real estate if the land registry. This is also the place to check if and for which amount liens and encumbrances exist for the property.
Once a decision for a purchase has been made, most transactions in Spain begin with a private contract (option, Opción de Compra, Arras contract or private purchase) which includes the details of the purchase. Which type of contract to use should be decided in cooperation with the lawyer and depending on the specifics of the case. The letter of intent will include the exact legal definition of the object, the final purchase price, the payment terms, the time scale for the implementation and the time of the handover of the purchased object. When signing this private contract, a deposit is usually paid, the amount of which is governed by contractual agreement and which will depend on the time for which the implementation of the contract is planned. If the deal is supposed to be concluded within 30 to 90 days, a deposit of 10% to 15% of the agreed purchase price is customary.
Instead of a direct payment to the seller, we recommend that a law firm will keep the deposit in a trust account until the notarization of the purchase contract. This ensures a speedy return of the funds to the buyer if agreements won't be kept.
In the case of existing but not yet finished new buildings, payments during the construction process are usually agreed upon. According to the Building Code, a bank or an insurance company will guarantee the payments. These laws also compel the builder to take out a ten-year insurance policy against construction damages for the benefit of the buyer.
When the total purchase price has been paid, the deed for the sale (escritura) will be established. It is advisable to instruct a lawyer for the conclusion of the contract because these deals are not carried out by notaries in Spain. The lawyer will forward the deed of sale to the tax authorities where the transfer tax will be calculated if the property has been resold or if it is a second-hand property. If the property is purchased directly from the developer, a stamp duty will be charged. Then the document will be submitted to the land registry for registration. A temporary registration of the transfer of ownership will be carried out immediately.
Important for sellers! Once the notarial deed of sale is signed, the ownership is transferred to the buyer! Make sure that you agree on performance upon counter-performance – handing over of the purchase price against signature under the notarial deed of sale.
Expenses when acquiring an object
The transfer tax (I.T.P.) of 8%, 9% or 10% will be charged to the buyer when real estate (villa, apartment, land, shop, garage) will be purchased, unless the seller is a developer or deals with real estate professionally.
If the “minimum tax value” of the property (which varies from region to region) is higher than the purchase price, then the minimum tax value will be applied. Based on the minimum tax value for the Balearic Islands, the following rates apply (other tax rates may apply in other autonomous regions):
- 8% up to 400,000 € of the actual value, or 30,000 € for garages, except for garages connected to the house
- 9% for amounts between 400,000 € and 600,000 € or from 50,000 € for garages
- 10% for amounts above 600,000 €.
price of the property: 1,250,000 €
up to 400,000 € – 8% = 32,000 €
on 200,000 € (400,000.01 € to 600,000 €) – 9% = 18,000 €
plus 650,000 € (600,000.01 € to 1,250,000 €) – 10% = 65,000 €
total amount: 115,000,- €
VAT and stamp duty (Impuesto sobre Actos Jurídicos Documentados): 10% + 1,2% are charged for villas, apartments or garages which are attached to a building if the seller is a developer or promoter or if he deals with newly built properties professionally.
VAT and stamp duty: 21% + 1,2% are charged for plots, shops or commercial garages if the seller is a developer, promoter, trader or a company. Generally any real estate intended for business use is covered under this rule.
Notarization and land registry
Three days before the notarization the notary will request a current excerpt of the land registry. When this excerpt of the land registry is mailed, the property will be blocked for ten days. If another notary will ask the land registry for an excerpt for the same property during that time, the land registry will convey this information to all other notaries who have requested such an excerpt. Both seller and buyer have to show proof of their identity at the notarization. The notary will then read out the prepared deed and will note either that the purchase price has been paid before the signing of the notarial purchase deed or that it will be paid in that instant. It is customary to pay with a bank-certified cheque at the notary's office. Immediately after concluding the deal, the notary will mail a notice of the purchase contract to the land registry. The instructed lawyer will then hand in a copy of the deed of sale (escritura) at the land registry (registro de la propiedad) afterwards.
Payment of the purchase price
The purchase price is paid in full, minus potential deposits, by the buyer to the seller or to third parties during the notarization of the purchase contract at the notary's office. In the case of financing, this may be done by a representative of the financing bank who will hand over a bank-certified cheque. Usually the fees for brokers and advisers are also paid at the notary.
When buying real estate in Spain, you should never pay by bank transfer before the notarial deed of sale has been signed. If the notarial purchase contract should not be concluded for whatever reason, you may have to initiate complex court proceedings for unjust enrichment in order to recover the payment. Such a proceeding may take years.
Fees of the notary and the land registry
The notary's and the registration fees are between 0.3 and 0.6 %, depending on the scope of the notarization or the complexity of the notarial deed of sale, e.g. if by-laws need to be notarized, payment plans to be included or in the case of partially finished buildings.
Lawyers in Spain calculate their fees based on a fee table issued by the Bar Association. These are only guidelines, but their purpose is to prevent price dumping. A lawyer is generally barred from working for lower fees. Because a real estate transaction involves several services (audit, drafting the contract, notarial contract, implementation) the fees are usually graded. Most lawyers now charge fees of between 1.5% to 2% of the total purchase price plus VAT and external expenses for the aforementioned services.
The “Plus Valía”
The Plus Valia is a tax on increase in value. It is calculated by the municipality on the basis of an index and takes into consideration the rise of the value of the property for the time between the purchase by the seller to the current date of sale.
The municipality will levy this tax on the seller. But it can also be agreed contractually who will bear the tax. The calculation of the tax is based on different variables (location, size of the plot, opportunities for building structures, duration of ownership by the seller), so that the amount to be paid may vary quite a lot and should be determined exactly before the purchase.
Summary ancillary expenses when purchasing real estate
The official total expenses incurred when purchasing a residential property in Spain are between 9 and 11%, plus the auditing and advisory fees, which amount to 1.5 to 2% of the purchase price, depending on the project volume.
II.) Further expenses that will be incurred after purchasing real estate in Spain
Property tax (IBI)
Local taxes need to be paid annually and will be calculated based on the cadastral property value or the value used by the Spanish fiscal authorities. The cadastral property value will consider the value of the plot as well as the value of the building, depending on type, location and use. Based on these evaluations, each municipality decides on the percentage which shall be used for the local taxes.
Waste disposal & water (basura y agua)
The municipal fees for waste disposal will be determined bed on the property and have to be paid every six months. For an apartment in Mallorca the waste disposal fees are between around 150 to 180 €, for a larger villa around 240 € per year. The water use is metered and has to be paid for every three months.
Contributions to the owners' association
The association of apartment owners is an organisation prescribed by law which is made up of the owners of apartments within a building or the owners of houses within one condominium. The purpose of this association is the ownership and maintenance and operation of the jointly owned parts of a building or a condominium. Each owner shares a percentage of the expenses. Usually this percentage is determined based on the size of the apartment or the plot in relation to the total size of residential units or plots.
The annual meeting of the owners' association will determine the budget for the annual expenses. The majority of the owners who are present or represented have to agree to the budget. The expenses vary substantially. They usually include the salary and the social insurance for the caretaker, maintenance of the gardens, maintenance of the lifts, repairs of the buildings, waste disposal, water for the gardens, electricity for lighting the communal areas, property insurance, security system and administrative expenses. A jointly owned pool may increase the costs substantially. The law requires that the president of the owners' association is an owner himself and that he be elected by the owners. He will not get paid for this job.
An apartment with 2 bedrooms in a building or a condominium with caretaker, pool and a small garden may incur monthly communal expenses between 120 € and 300 €. In a luxury condominium with several employees at the service of the owners' association and a large range of services these expenses may be as much as 800 €. You should therefore obtain information from the owners' association about the actual ancillary expenses before the purchase.
Standard insurance coverage for an apartment worth €300,000 with furniture worth 48,000 € will cost around 400 € per year. You should keep in mind that the owners' association of an apartment house has to take out insurance for the house at the reconstruction value. The individual apartment owner's insurance policy therefore only has to cover damages in the interior of the apartment, furniture and liability towards third parties. We recommend to take out a risk insurance for the case that the insurance of the owners' association won't pay. For a house with a reconstruction value of 500,000 € and furniture worth 180,000 € the premium will be around 1,500 €.
Household helps are available either as full-time employees or on a hourly basis. The salary for a full-time help in a private home are between 900 € and 1,400 €, plus around 160 € social security payments. Pat-time helps are usually paid between 10 € and 15 € per hour.
The average hourly wage for a gardener is between 15 to 20 €. A full-time gardener will have a salary of around 1,100 to 1,400 € per month (plus around 40% social security contributions). In the case of apartments and terraced houses, the maintenance of the communal gardens is covered by the communal expenses.
Electricity will be invoiced every two months with a basic tariff being invoiced even when the object is not being used. This basic tariff is calculated on the amount of electricity which could theoretically be used if the property was consuming electricity at full rate. The minimum basic tariff for an apartment is between 35 € and 45 € per month. For a house this will be around 90 € to 130 €.
There are flatrate offers for phones and DSL available all over Spain.
III.) Further taxes and duties
The following are the most important taxes and duties for non-residents in Spain:
- tax for increase in value (PlusValía)
- annual property tax (IBI)
- fees for waste disposal and water (Basura y agua)
- wealth tax (Impuesto de Patrimonio)
- income tax (Impuesto sobre la Renta)
- capital gains tax (Impuesto sobre Ganancias Patrimoniales Inmobiliarias)
Spain re-introduced the wealth tax in 2011. The Royal decree of the law 13/2011 of 1. September 2011 re-introduces this tax and lays out the new thresholds for its calculation. Law 16/2012 of 27 December 2012 extends this law to the 2013 tax year. The wealth tax applies to natural persons with tax residence in Spain and to non-residents who own goods or title on Spanish soil.
The Spanish wealth tax is based on the net assets on 31 December of each year, the tax rate ranges from 0.2% to 2.5%. Tax-residents are taxed based on their net assets in Spain and abroad, while non-residents are taxed based on their net assets taxable in Spain or their assets on Spanish soil.
The new wealth tax has the following consequences:
The wealth tax is applicable for business years 2011, 2012 and 2013. As of 1 January 2014 the tax will be suspended again (thus the corresponding tax returns have to be filed in the years 2012, 2013 and 2014).
The exempt amount is 700,000 € (it used to be 108,000 €). Individuals with assets worth less than 700,000 € are thus exempt from paying wealth tax.
Any resident may deduct the value of his usual place of residence in Spain up to a maximum amount of 300,000 € (this used to be 150,253.03 €).
The property tax has to be paid to the autonomous regions. The current tax rates can be inferred from the following chart.
TAXABLE ASSETS IN €
REMAINDER OF TAXABLE ASSETS
APPLICABLE TAX RATE %
The wealth tax is applied individually to each natural person. If a property is owned by several people, each of these persons is taxed based on their share of the assets and the liabilities. The instructed lawyer can usually point out ways to minimise this tax.
Non-residents owning real estate in Spain have to pay income tax on their income generated by the property. Using the property for oneself is also regarded as “income”. There are two types of taxation for income generated by property:
- Income from leasing property: 24.75% on rental income (revenues minus expenses)
- Income from using the property oneself: 24.75% on 1.1% of the cadastral value of the property (if the cadastral value was re-evaluated after 1 January 1994; otherwise: 24.75% of 2% of the cadastral value)
These rates currently apply to income from real estate in Spain. For each source of income, special taxation rules apply.
Residents in Spain have to submit their income tax return (Declaración de la Renta de las Personas Físicas) and provide information on their income, regardless of its sources. If someone lives in Spain for more than 183 days of the year, they are a resident and will be taxed.
CAPITAL GAINS TAX AND DEDUCTIONS
The capital gains tax rate for sales of real estate for non-residents is 21% for 2012, 2013 and 2014. Capital gains tax is paid on the profit resulting from the difference of the property value in the year of purchase (purchase price + taxes + expenses) and and the year of sale (sales price minus expenses and taxes). The percentage which changes every year and is included in the government's budget will also be applied. If the property is sold by a natural person who had acquired it before 31 December 1994, the profit and thus the tax base will be reduced.
All non-resident sellers are subject to a levy of 3% of the sales price, irrespective of the year in which they acquired the property. The buyer has to deposit these 3% to the tax authorities with form no. 211. Then the buyer has to hand a copy of form no. 211 to the non-resident seller to prove that the retained money has been paid to the tax authority. The seller may then deduct this amount from the amount which he will have to pay according to the tax return declaring his profit. If the retained amount is higher than the tax on the profit, a request can be filed for the difference to be paid back.
For residents, the capital gains tax on property sales has changed in 2013. If a profit was made within a one-year timeframe, it is included in the general taxation base and will be attributed to the income from employment (up to 56%). Profits generated over more than one year will be taxed like in the past, i.e. with a fixed tax rate between 21% and 27%. From 2013 on the lower taxation for “speculative profits” was thus eradicated and these profits are now taxed similar to income from employment.
Taxable income from savings
Applicable rate %
Up to 6,000 €
Between 6,000€ and 24,000€
More than 24.000€
Capital gains from the sale of real estate on Spanish soil which had been acquired between 12 May 2012 and 31 December 2012 are 50% tax exempt. But there are some exceptions to this rule as well.
IV.) FURTHER QUESTIONS AND ANSWERS
Financing of real estate
After the banking crisis, Spanish banks are now again interested in issuing mortgaged loans. But the criteria have become far more restrictive. A qualified foreign borrower who is credit-worthy may obtain a mortgage of up to 70% of the property's official estimated value. It has to be kept in mind though that the estimates of the recognised experts are up to 30% below the actual market value.
But foreign applicants for mortgages should not give up easily. The documents that the banks will require have to be prepared well. De Micco & Friends will support you in all stages of the preparation and will connect you with the perfect partner for financing.
The documents required by Spanish banks are not much different from what banks in other countries require. You should always prepare the following documents:
- tax returns for the last 2 or 3 years
- balance sheets and P&L accounts for the last 2 or 3 years (if you own a company)
- wage slips for the last 6 months and proof of other regular income
- a list of all current monthly expenditures
- list of all your assets and liabilities, if possible certified by a tax consultant or auditor
- copy of your passport/ID-card
The required documents may also be submitted in English or German. For any other language, you need to prepare an official Spanish translation.
For citizens from Eastern Europe, Russia or Ukraine, it may be a bit more complicated to obtain a mortgage because the local finance and banking systems are not as transparent as in Western Europe. But depending on the personal situation, the kind of the purchase object and the creditworthiness of the borrower, mortgages are also possible for these clients. But you have to expect that it will take longer to process your application.
Administration, payment of ongoing expenses, representation
For larger objects or also if you carry out other business deals in Spain besides the real estate investment, De Micco & Friends will represent you in all organisational matters, including the payment of expenses on time, and will represent your interests during your absence.
For smaller objects, your Spanish bank will also support you in making the regular payments for expenses.
Stay as a tourist
EU citizens can stay in Spain without any limitations. There is no longer any visa required for some non-EU countries, like the USA. The maximum duration of your stay depends on your home country. It is important to keep in mind that even if you are not residing in Spain, the tax authorities will treat you as a resident if you spend more than 183 days per calendar year in Spain and you will be fully liable to pay taxes.
On the other hand, having residence in Spain can be quite useful for the citizens of certain countries, e.g. in order to have free travel privileges. Russian citizens for example may gain residence if they acquire property worth at least 500,000 €. De Micco & Friends will inform you of the current guidelines, the advantages and disadvantages in a free initial consultation.
Schools in Spain
All major cities in Spain offer international schools and pre-schools. Many offer full board on a weekly basis. Students are educated in different languages like English, German or French and may graduate with a baccalaureate. De Micco & Friends can provide you with a current list of local and international schools and recommendations.
In many major Spanish cities highly qualified medical care is provided. Mallorca for example has internationally renowned private clinics and a new and modern large hospital and thus offers optimal case.
Private health insurance policies can be taken out locally. These insurance policies which cover more services cost between 50 € and 130 € per person per month, depending on the age and the health situation. The Spanish healthcare system allows EU citizens who are contributing to a healthcare system to use the Spanish system with form no. E-101. Contributing residents who are self-employed or own a company or who are in employment may use the Spanish healthcare system automatically by paying national insurance contributions.
Whatever your plans for Mallorca and Spain, whether you wish to acquire real estate or start a business, obtain residence or simply enjoy retirement, De Micco & Friends will assist you in any way.
Tell us your ideas and your plans – we tell you what will work and how it will work.
The initial consultation, during which we usually already give you some advice and consultation, is always free of charge and of course without any obligations.
We are looking forward to your visit!
De Micco & Friends
Please note! This information has been put together in accordance with due diligence performed by lawyers. We assume no liability for its content or it’s timeliness. This information is no substitute for the individual situation-based advice provided by our lawyers and tax consultants.
De Micco & Friends Offices in Spain
For information and a free initial consultation please contact our headquarters in Palma de Mallorca from anywhere in Spain. Depending on the location and type of your project, whether the focus is on tax or legal advice and your language preferences, our local lawyers and tax consultants will then contact you without delay. Bilateral or international projects in Spain are usually managed by our offices in Palma de Mallorca, Barcelona or Madrid.
This information is current as of the date of its publication and does not necessarily reflect the present state of the law or relevant regulation.