Taxation of Capital Gains on the sale of property acquired before 31 December 1994

In the last two financial years, more than 31,000 second-hand property transactions have been carried out and a large number of them are for properties acquired before 31 December 1994. These capital gains have an important reduction in the income tax return, as their correct application can save thousands of euros.

Until 2015, we applied the so-called “abatement coefficients”, which exempted capital gains generated before 20 January 2006 if the property from which the income was derived was acquired before 31 December 1994.

At that time, when a property acquired before 1 January 1995 was sold, the capital gain generated between the year of acquisition of the property and 20 January 2006 was calculated on the one hand and, on the other hand, the gain generated from 21 January 2006 until the date of sale. To the gain generated before that date we applied a depreciation coefficient, which was the result of multiplying the number of years that the property had remained in the seller’s estate until 31 December 1994 by 11.11%. This result was exempt from taxation.

With the entry into force of the Personal Income Tax Reform, this rule was modified, replacing the abatement coefficients mentioned above with “reduction coefficients”, which would be applicable provided that the value of all the transfers carried out since 1 January 2015 did not exceed 400,000 euros.

How do we apply these reduction coefficients?

irstly, it is necessary to distinguish between the time of generation of capital gains, before and after 20 January 2006. Only the part generated before 20 January 2006 by application of the reduction coefficients will be subject to reduction.

The amount of the gain is reduced as follows:

We calculate the period of permanence in the patrimony of the element that has been transferred, measuring the number of years that it was in our possession counted up to 31 December 1994 and rounding up (If we bought it in June 1991 we will have had it 4 years, the years 1991, 1992, 1993 and 1994, as if 1991 were a full year).

Afterwards, we will find the transfer value of ALL the assets to which the reduction coefficients have been applied, i.e. those transferred since 1 January 2015 (when the change to “reduction coefficients” came into force), so that an accumulated transfer value (X1) will be generated in which we will not include the value of the last asset transferred (X2) during the year we are going to declare.

As we have a limit on the first 400,000 euros, we will only be able to apply coefficients to this amount, so that once it has been used up, the coefficients can no longer be applied for life.

In the case of still having part of the 400,000 euros not consumed, we can find the following:

That the amount consumed (X1) plus the transfer value of an item for our next income tax return is less than 400,000 euros. We will then recalculate that part of the gain has been generated up to 20 January 2006 and we will have it exempt in the proportion explained above.

That the amount consumed (X1) plus the transfer value of the current element (X2) exceeds 400,000 euros. In this case, the reduction calculated up to 20 January 2006 must be made on the proportional part of the sale price of X2 until we reach the limit of 400,000 euros.

Once the amount of the reducible gain has been determined, the reduction coefficients differentiated according to the nature of the asset transferred are applied.

1. Shares admitted to trading: 25% reduction
2. Real estate: reduction of 11.11%.
3. Other assets and rights: reduction of 14.28%.

Lastly, and importantly, the limit of 400,000 euros operates individually per taxpayer depending on the ownership of the item. In other words, the 400,000 euros are exhausted for each taxpayer.

It is clear that it is crucial to keep track of our accumulated value, as any error in this calculation can give us a completely different result for the purposes of the capital gain to be imputed in our tax return.

We are aware of the difficulty of calculating this type of operation and how difficult it is to apply, which is why we recommend that you always contact a professional you trust.

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