Imagine you’re in the process of relocating from your current home to a new one, and you’re considering donating your current property to your children. However, before making a decision, it’s essential to understand the fiscal implications involved in this scenario.
Fiscal Costs:
- Donation Tax (Impuesto sobre Donaciones, ISD): When you gift your home to your children, they may be subject to donation tax depending on the circumstances and the region of Spain where the property is located. Fortunately, there are potential reductions available. For instance, in Andalusia, there’s a significant tax reduction for cash gifts up to €120,000 if your children are under 35 years old. Moreover, if your child has a disability, the eligible deduction amount can increase to €180,000 without any age limit.
- Income Tax (IRPF): Even though you’re giving away the property, you may still need to pay income tax as if you had sold the house. The difference between the purchase price and the sale value of your home will be subjected to capital gains tax, except if you’re over 65 years old, in which case you’re exempt from this tax.
Best Case Scenario:
If you’re over 65 years old and your current home is your primary residence, you may not be liable for capital gains tax under certain circumstances, even if you’re not planning to purchase a new home.
The Alternative: Selling and Donating the Cash:
If your new home is of equal or greater value than your current one, selling the old property and donating the proceeds to your children might be a better option. In this scenario:
- Capital gains obtained from selling your primary residence may be exempt from taxation if the entire amount is reinvested into a new primary residence (or used for the repairs of one that will become your primary home). However, capital gains tax may be payable on any amount left after paying off the mortgage.
- You can then gift the money from the sale to your children for them to purchase a house. The cost of donating the money will be similar to donating the asset (your old home).
- Your children will need to pay either ITP or IVA on the purchase of their new home.
In Summary:
Donating your old home to your children and purchasing a new one may incur capital gains and donation tax. However, under specific circumstances, selling your home and giving your children the proceeds could exempt you from capital gains tax. Nonetheless, your children will still need to pay ITP/IVA on the house purchase.
It’s crucial to assess whether the cost of ITP/IVA is lower than the tax savings on the IRPF to determine if this scenario is worthwhile.
Remember, the information provided is for guidance purposes only, and individual circumstances may vary. For personalized advice, consider consulting an independent financial professional.
Maria Luisa Cervantes is a chartered accountant and gestor with expertise in expat tax matters. You can reach her at 950106490, visit her website www.cervantesalarcon.com/en, or email your inquiries to maria@cervantesalarcon.com.