What are the usual steps to buy a real estate property in Spain?
Ownership of a real estate property is transferred to the buyer when the following requisites are met:
- the parties have agreed the essential purchase terms, mainly the identification of the property and price, and
- the buyer takes possession of the property. This is usually achieved in two steps.
First, the parties sign a private contract agreeing on the main purchase terms and conditions and exchange 10% of the price as down payment. Second, they appear in front of a Notary Public in order to sign purchase deed, pay the price in full and hand over the keys of the property to the buyer. At this point, the buyer has become the owner of the property. Finally, the buyer must register his ownership at the Land Registry in order to protect the acquisition.
What legal checks should be done before buying a property?
It is recommended that the buyer engages a lawyer to carry out due diligence in order to confirm that:
- The property complies with the urban planning regulations of the area.
- The vendor is the registered owner in the Land Registry.
- The property is free of charges in the LandRegistry and up to date in the payment of the taxes and community fees.
- The property must be in good conditions of habitability.
Buying through a company.
Using a company as a vehicle to buy a property is only recommended when the owner intends to use the property as a business, either by renting or through acting as a developer. Otherwise, the double taxation (at the company and at shareholder’s levels) and the annual running costs make the company ownership of a property less advantageous when compared to buying as individual.
In compliance with the Spanish Money Laundering Prevention Rules, lawyers, estate agents, banks and notaries dealing with a real estate transaction are obliged to investigate the origin of funds to be invested in the purchase of the property. Failure to do so when money laundering is involved exposes these professionals to very serious penalties, both criminal and economic.
Most law firms follow a protocol which involves at least signing a form and providing documentary evidence of the clients’ address, proof of funds in bank account, tax declarations, etc. Should the lawyer detect there is money laundering involved, he shall stop advising the client and report the case to the Bank of Spain.
What are the purchase costs and taxes?
Purchase costs and taxes incurred in the purchase of a property are usually paid in the following way.
The buyer pays the followings:
- Notary and Land Registry Fees: 0.3% of the purchase price approx.
- Lawyers’ Fees: there are no specific fees set by the Bar Association.It depends on the amount of the transaction and the degree of work undertaken, usually 1% of the purchase price plus VAT.
- Transfer tax depends on whether the buyer is an entrepreneur or a company and whether it is a second or a first-hand property.
- If it is a second-hand or resale purchase, the buyer pays transfer tax on a scale of 8 to 10% of the purchase price (8% on any amount up to 400.000 €, 9% for the remaining price between 400.001 € and 700.000 and 10% on any amount exceeding 700.001 €). However, when both parties are entrepreneurs or companies, it is possible to pay 21%VAT rather than Transfer Tax if some requisites are met.
- If the property is brand new or, the buyer pays 10% VAT plus 1.5% Stamp Duty (in Andalucía) on the purchase price (a total of 11.5% tax rate).
The vendor pays the following taxes and fees:
- Capital Gain Tax. On account of this tax, the buyer shall withhold and deposit with the tax Office 3% of the purchase price provided the vendor is a non-resident individual.
- Municipal Tax on the Increase of the Land Value (“plusvalía”).
- Agent fees for introducing the buyer: the standard commission is 5% of the purchase price plus VAT but it can be negotiated in advance.
What documentation must the buyer have in place before buying a property?
- Identity card or passport.
- Foreigners must also have a NIE number (Número de Identificación de Extranjero) which is the identification number in Spain for everyone who is not a Spanish citizen.
For entities (companies, associations, etc):
- Tax number.
- Certificate of Incorporation and By-Laws and translation into Spanish.
- NIE number of the legal representative provided he is non-resident in Spain.
- Statement made before a notaryidentifying the last beneficiariesof the companyowning more than 25% of the share capital.
A bank account will also be necessary. Banks follow their own protocols to accept the client. At least they will ask for copy of the passports, NIE number, proof of address, payslips and/or income tax return, etc.
What precautions have to be taken regarding off-plan purchases?
It is convenient to do the following checks:
- Verify the developer is the registered owner of the land where the dwelling will be built.
- Ask for copy of the building license.
- Verify that the building license corresponds to the project under which the building will be built.
- Make sure payments to the developer are done via bank transfer to a special account opened by the developer for this purpose which is controlled by the bank.
- Verify the developer givesthe buyer abank guarantee assuring the refund of the money as purchase price. Such a guarantee can be executed in the event the building works don’t start or are not completed on the date promised by the developer.
- The private purchase contract should clearly state a date for the handover of the property.
- Assure thestatutes of the future community of owners don’t impose any unreasonable limitation of ownership.
- First Occupancy License must be granted before going to completion at the Notary.
Tips for clients looking to build their own property.
A self-promoter must alwayshave a building permit before starting the works. He will first need to engage an architect which will draft a project to be submitted and approved by the Town hall.
It is convenient to find a reputable builder and formalize with him a proper contract in written form.
Once the house if finished, a deed must be signed by the owner in front of a notary public describing the house built and attaching some compulsory documentation such as building and first occupation licenses, decennial insurance covering structural damages, building book, certificate of end of building works as per the project and energy efficiency certificate. 1,5% Stamp Duty on the costs of the building works must be paid before registering the house in the Land Registry.
Annual running costs.
The following taxes can be levied by the Spanish and local authorities every year.
- IBI (Impuesto de BienesInmuebles) or council property tax: it is calculated by applying a percentage to the catastral value of the property. It is paid annually regardless of whether the property is used or not, rented or not.
- Wealth Tax: it levies the wealth of a non-resident individual in Spain. There is a tax allowance on the first €700.000. The remaining wealth is calculated using a sliding scale starting with 0,2% on the first 167.129 € of taxable baseup to a maximum of 2,5%.
- Income Tax: The law establishes a notional income on properties owned by non-residents equivalent to 19% of 1.1% of the cadastral value (if this value has been revised since 1994). This tax is due when the property is not rented out. For periods where the property is rented, the owner must pay an income tax of 19% of the rents received minus expenses incurred in maintaining the property (non EU citizens have no right to deduct expenses).
Other costs arecommunity fees.If the house belongs to a community of owners, it shall contribute to the community budget approved at the AGM as per the share assigned to the property by the developer.
Whatminimum legal checksshould be done when selling a property?
The vendor must assure he can deliver the property in the conditions agreed in the private contract. If nothing is specified, the law prescribes that the property shall be sold in in good conditions of habitability. It is therefore important to describe the property accurately as possible. In case of a hidden defect showing up after completion (regardless of the vendor being aware of it or not) the buyer can claim damagesand, in case of serious defects, the termination of the contract.
The price must be paid in full at completion. This is usually done with a bankers draft that the buyer hands over the vendor simultaneously with the signing of the purchase deed in front of the notary.In the unlikely event of a deferred payment, a condition precedent must fixed in the deed and it be registered with the Land Registry.
The vendor must also inform the community of owners of the new owner’s details, otherwise the vendormight be found liable for futurecommunity debts.
Following completion, the vendor shall settle the “plusvalía tax” and Capital Gain tax in due time.
Selling costs and taxes.
There are two taxes involved.
The municipal tax on the increase of the land value (“plusvalía”), which amount depends on the cadastral value and the number of years that the vendor owned the property. When selling at a loss this tax should not be paid.
Capital gain tax. For non-residents it is 19% of the net gain. On account of this tax, the buyer must retain 3% of the purchase price and deposit it with the Tax Office. In case of no gain, it is possible to ask for the refund of this 3%.
Agents fees are paid by the vendor.
Notary and Land Registry fees are usually paid by the buyer. The annual IBI tax can be apportioned between the parties based on the date of completion.