ATTENTION PROPERTY OWNERS – DID YOU KNOW?

If you are planning a major renovation of your property in Spain, there is something very important you should consider before you start throwing away invoices and receipts.

Many property owners are unaware that money invested in substantially improving a property can potentially be taken into account when calculating the property's acquisition value for tax purposes.

This can become particularly important when you eventually sell.

Why does this matter?

Imagine you purchased a property for €400,000 and subsequently invested €150,000 in substantial renovation and improvement works.

Years later, you sell the property for €700,000.

At first glance, it might appear that you have made a gain of €300,000:

Purchase price: €400,000
Sale price: €700,000
Apparent increase in value: €300,000

However, if the €150,000 spent on qualifying improvements can be properly evidenced and included within the property's acquisition cost, the calculation can look very different:

Purchase price: €400,000
Qualifying improvements: €150,000
Adjusted acquisition value: €550,000
Sale price: €700,000
Potential gain before other allowable costs: €150,000

That is a significant difference.

Of course, the precise tax treatment will depend on your individual circumstances and on which expenditure qualifies as an improvement rather than ordinary maintenance or repairs. Nevertheless, it demonstrates why documenting a renovation correctly can be so important.

What is a Declaración de Obra Nueva?

Following substantial building works, it may also be necessary or advisable to formally update the legal description of the property through a Declaración de Obra Nueva, particularly where the works have altered the constructed area, layout or physical description recorded at the Land Registry.

This process helps ensure that the property you actually own corresponds with the property described in the official documentation.

For example, works might include:

• extensions or additional constructed areas;

• new swimming pools or ancillary buildings;

• significant structural alterations;

• major refurbishment or reconstruction; or

• other works that materially change the registered description of the property.

The appropriate procedure will depend on the nature of the works, the planning permissions obtained and the existing legal status of the property.

The paperwork is important

One of the biggest mistakes homeowners can make is spending a substantial amount renovating a property but failing to maintain a proper record of that expenditure.

Keep your invoices.

Ideally, you should maintain a complete renovation file containing invoices from builders and contractors, architects and technical professionals, licences and Town Hall documentation, proof of payments, and any other documents relating to the works.

If you spend €100,000, €200,000 or more improving a property but cannot adequately demonstrate that expenditure years later, you may have difficulty claiming all of the qualifying costs when the property is eventually sold.

Repairs and improvements are not necessarily the same thing

This is an important distinction.

Not every euro spent on a property will automatically increase its acquisition value for Capital Gains Tax purposes. Spanish tax rules distinguish between repairs and maintenance and expenditure that constitutes a genuine improvement or investment in the property.

Replacing something that is worn out may be treated differently from substantially upgrading, extending or transforming a property.

For major renovation projects, it is therefore sensible to obtain appropriate tax and professional advice and to make sure the works are properly documented from the outset.

Planning a renovation? Think about the eventual sale now

When renovating a property, most owners understandably concentrate on the immediate questions:

How much will it cost? What will the house look like? How long will the work take?

But there is another question worth asking:

How should I document this investment so that I am properly protected when I eventually sell the property?

Good planning at the beginning of a renovation can make the property easier to sell in the future, ensure that its legal documentation accurately reflects what has been built and, importantly, help ensure that qualifying investment in the property is recognised when calculating a future capital gain.

Our advice to property owners

If you are undertaking a substantial renovation in Spain, do not treat the invoices and licences as paperwork you can dispose of once the builders have finished.

Keep a complete record of the project.

Those documents could prove extremely valuable many years later when you come to sell.

This article is intended as general information only. Capital Gains Tax treatment depends on individual circumstances and the nature of the expenditure. Property owners should obtain advice from a qualified tax adviser regarding which renovation and improvement costs can be included in the acquisition value for tax purposes.