It is common that various people are joint owners of one or various assets and, very often, one of these is a property. This is usually due to the fact that the asset has been acquired by various individuals at the same time, that it belongs to a community of property or comes from an inheritance in which an element has been assigned “undividedly” to various heirs. The problem comes when we want to terminate said community and doubts arise: how do we allocate assets? Do I have to pay tax on it?
With the aim of terminating the condominium, the co-proprietors are allocated all of the assets and rights in the community based on their participation quota; however, it is very common that there ends up being an allocation excess in favour of one of the co-proprietors, which is normally compensated in cash.
Firstly, in order to clarify aspects regarding how and how much this type of operation is taxed, we must explain some concepts:
It is important to know how the Spanish Penal Code defines the concept “Community of property”. Article 392 of said Penal Code states: “a community exists when the property of one thing or right belongs “undividedly” to various individuals.”
So it’s simple, the co-ownership of something implies the existence of a community, even though said community has not been explicitly created. So, now that this concept has been clarified, we’ll answer the following question: Which taxes are involved in the event of terminating said community?
Taxation on the Tax on Property Transfers and Documented Legal Procedures (ITP-AJD)
If the termination of the condominium is carried out in a way in which the assets or rights are allocated to each co-proprietor in exact proportion to their participation quota in the common property, there will be no transfer, since it involves the allocation of a quota that already belonged to the individual. Consequently, this operation would not be taxed for Onerous property transfer, but rather it would only be subject to the gradual quota for Documented Legal Procedures, which are usually small quantities and are paid along with the Notary’s invoice when the operation is carried out through a public deed.
However, if there is an allocation excess for some of the co-proprietors, which is common in this practice, then it would become a different taxable transaction with regards to the excess part:
- If the allocation excess is compensated (with other assets or rights, such as in cash) it will be considered an onerous transfer and the beneficiary must pay tax under the concept of ITP-AJD for Onerous Property Transfer at the current tax rate in force in each Autonomous Community, pursuant to Article 31.2 of the Spanish ITP-AJD Law.
- If, on the other hand, this allocation is free (lucrative) it shall be taxed under the concept of Inheritance Tax, in accordance with the applicable regional Law.
Notwithstanding the foregoing, and it is important to bear in mind that if this allocation excess is inevitable because the asset to be allocated is indivisible, pursuant to Article 1.062 of the Spanish Penal Code, “when something is indivisible or greatly depreciates upon its division, it may be allocated to one co-proprietor, paying the excess to the other co-proprietors in cash”. In this case the excess would not be subject to onerous property transfer, it would be taxed through Documented Legal Procedures Tax like the termination of the condominium itself.
In this regard, and while it is necessary in each case to assess whether or not we are faced with an indivisible asset or one which greatly depreciates upon its division, there are many Resolutions in the Economic-Administrative Courts that consider properties as “an asset that, if it is not essentially indivisible, would greatly depreciate upon its division”, as referred to in Binding Consultation 0952-18 of 14th April.
Lastly, it is important to highlight the Supreme Court’s recent sentence no. 1484/2018, of 9th October, that, contrary to the grounds sustained by the Tax Authority, has determined that in the event of the termination of the community of property, the taxable base for liquidating the AJD is the part of the value of the property that corresponded to the co-proprietor and that is “transferred” to terminate the condominium, that is, in the case indicated, 50% of the property’s value and not the property’s total value as applied by the Tax Office.
This jurisprudential doctrine is extensive to other indivisible situations that are terminated with the allocation of an asset to a single co-proprietor who already held a share in it and, moreover, it opens the way to request the reimbursement of what has been unduly paid by the taxpayers in tax declarations presented in the previous 4 years which are not prescribed, if the termination of the condominium was liquidated on the full value of the assets to be allocated, as required by the Tax Authority.
Taxation on Spanish Income Tax (IRPF): Is there capital gain?
The Spanish Income Tax Law applied a similar reasoning, considering that there is no alteration of the taxable person in the cases of division of the common asset, termination of joint ownership or termination of the community of properties (Art. 33.2 of the Spanish Income Tax Law).
However, if we are dealing with an allocation excess because one of the co-proprietors is allocated a higher quantity than that corresponding to their indivisible quota, a capital alteration would exist and the existence of capital gain must be assessed.
By way of example, in the frequent case of allocating immovable properties, it would be necessary to determine whether there is a difference between the value of the property allocated on the condominium’s termination date and the value on the date on which it is allocated or acquired by the community of property, as referred to in the Central Economic-Administrative Court’s recent Resolution on 7th June 2018.
Therefore, the different cases must be gathered before the allocation of an immovable property:
- If the immovable property is allocated based on the ownership quota of each co-proprietor, there would be no capital alteration, even if its value on the condominium’s termination date is higher than that on the allocation date.
- If the immovable property is allocated in a proportion which does not correspond to the ownership quota of each co-proprietor, compensating the others in cash, but there is no difference between the value of the property on the condominium’s termination date and the value on the allocation date, there would be a capital alteration for the co-proprietor receiving the allocation excess. However, there would be no capital gain or loss, since the value of the property has not changed.
- However, if we are dealing with a case in which the immovable property is not allocated to each co-proprietor based on the ownership quota, compensating the others in cash, and there is also a difference between the value of the property on the condominium’s termination date and the value on the allocation date; there would be a capital alteration in the co-proprietor receiving the allocation excess, and there would be a capital gain subject to Spanish Income Tax, since the property has appreciated.
And what happens to the Municipal Capital Gain (plusvalía municipal or IIVTNU in Spanish) if part of what is allocated are immovable properties?
Appreciation of Urban Land Tax (municipal capital gain) applies a similar logic to that discussed for Income Tax and ITP-AJD, in such a way that if the termination of the condominium supposes that the assets and rights allocated to each co-proprietor is carried out in proportion to their participation quota, without any allocation excess, this division is considered to have declarative rather than translational effects because it is not actually allocating the co-proprietors something that they didn’t previously have. In this case, the taxable transaction of the municipal capital gain tax would not occur and, therefore, the operation would not be subject to said tax.
Likewise, if as a result of the indivisibility of the common asset, which is regulated by precept 1.062 of the Spanish Penal Code, the only way of terminating the community of property is by allocating it to one of the co-proprietors and compensating the others in cash; it is understood that an abstract right is also being created and it would not be classed as an immovable property transaction, therefore, it is not subject to the aforementioned municipal capital gains tax.
In any other case, if the allocation excess is not the result of one of these reasons, it would indeed be subject to the Appreciation of Urban Land Tax, as indicated in Binding Consultation 1479-17 of 12th June which indicated that “a transfer of the property from the rest of the co-proprietors to the beneficiary would exist only when the “allocation excess” could have been avoided or at least reduced with a different allocation of the assets and, therefore, it would be subject to IIVTNU.”
Lastly, it is important to highlight that if only one element of all of the assets and rights belonging to the community of property is allocated, this is not classed as a termination of condominium as such, but rather an asset transfer. In this case, it shall be subject to ITP-AJD as an Onerous Property Transfer, the municipal capital gain tax would apply if it involves an immovable property and it could give rise to a capital gain or loss depending on the allocation and asset transfer values.
As you can see, there are many cases to be assessed with regards to the termination of condominium, in which different taxable persons can be involved (which may also be various communities of property created at different times), different types of assets and numerous ways of allocating the assets to the co-proprietors, thus we strongly recommend that you contact a reliable professional before carrying out such operations.