The sale of a real estate generates in the selling party a capital gain or loss whose value will be determined by the difference between the acquisition value and the transfer value. With regard to the acquisition value it will be necessary to see if it has been for valuable or lucrative title.
In the first case, if it was made for valuable consideration in accordance with article 35 of the LIRPF, the acquisition value will be formed by the sum of:
- The actual amount for which such acquisition would have been made and,
- The cost of the investments and improvements made in the acquired assets and the expenses and taxes inherent to the acquisition, excluding interest, which would have been paid by the acquirer.
With respect to the expenses and taxes inherent to the acquisition, in accordance with the criteria of the Directorate General of Taxes in different tax consultations (binding consultations V2584-16 and V0131-04), these are those such as, notary fees, property registration, agency, lawyer, Tax on the Increase in Value of Urban Land (colloquially known as Plusvalía municipal), corresponding to the property and paid on the acquisition, and the Tax on Property Transfer.
With regard to the Tax on the Increase in the Value of Urban Land, it should be specified that the purchaser will have to prove that, despite not being a taxpayer of said tax, he agreed with the seller that he would assume the payment of said tax. This accreditation will have to be made by any means of proof admitted in Law (including the text in the deed of sale would be sufficient).
In the second case, if it was made for profit, in accordance with article 36 of the LIRPF, the acquisition value will be taken as the value declared in the Inheritance and Gift Tax, as well as the quotas for said tax that would have been levied on the acquisition of the property.
Returning to article 35, section b) of the LIRPF, it states that the “investments and improvements” made in the acquired assets are included in the acquisition value, but it does not define what investments and improvements are.
To do so, we must turn to the Resolution of March 1, 2013, of the Institute of Accounting and Auditing of Accounts, which dictates the rules for recording and valuation of tangible fixed assets and real estate investments.
The aforementioned Resolution defines “improvement” as the set of activities by means of which an alteration is produced in a fixed asset element, increasing its previous productive efficiency. Likewise, the Resolution defines the concept of expansion as “a process by which new elements are incorporated to a fixed asset, obtaining as a consequence a greater productive capacity“. Therefore, on this basis, it must be understood that repairs and maintenance are those intended to maintain the useful life of the property and its productive capacity or use, while those that result either in an increase in the capacity or habitability of the property or in a lengthening of its useful life can be considered as extensions or improvements. On the other hand, the expenses for the repair and maintenance of the property, which are included in art. 13 of RD 439/2007 (Personal Income Tax Regulation), as deductible expenses in the determination of the yield of the real estate capital, do not form part of the acquisition value.
In recent Judgment of the Superior Court of Justice of Madrid, dated December 16, 2019, this comes to say that:
“This rule, which has been included in successive tax regulations, is interpreted by case law on the premise that the classification of specific works as improvement or repair is random and difficult because it depends on different factors, However, it is generally considered that repair and conservation expenses are those whose purpose is to maintain the real estate in original conditions of use, provided that they do not cause the modification of the structure, configuration or habitable surface of the property, and the addition of structural elements or elements of use that represent a greater acquisition value because they imply their incorporation to the property as one more element of the same, constitutes an improvement. In synthesis, repair works are those whose purpose is to fix and correct damages so that the property is in normal conditions of use, while conservation works are those that tend to maintain the property in a correct state and to avoid damages to it…”
However, in the event of a tax audit, it will be the taxpayer who, in accordance with Article 105 of the General Tax Law, will bear the burden of proof when it comes to proving that the work carried out on the property is an improvement and not a repair.