You would think it would be simple to pay your tax on a purchase but sometimes this is not the case. Paying your 7%, or 4% on new builds, may sometimes involve rather complicated mathematics.
Once upon a time there was a growing property market in Spain with prices rising at 20% annually for a long period. Prices therefore rose to a level that had nothing to do with how local taxes are charged. Prices in most areas rose by between 130 and 150%. So how does this affect your tax payments?
Let me explain.
Your “Council Tax” in Spain is called the IBI. It is based on the “Valor Catastral” of a property which can be found in the catastro of course. The problem was that the Catastral value remained the same while prices were rising as bands were not changed. Therefore the government brought out a law introducing multiples to the Valor Catastral. Where prices had risen more the multiple was higher and where they had risen less it was lower. Simples! An example would be that a property with a Valor Catastral of 100,000 Euros might lie in an area with a multiple of 1.8. This gives it a “real” Catastral Value, for tax purposes, of 180,000 Euros. OK?
Equally, the local tax is still estimated at the lower value which is logical.
In a rising market the problem doesn’t exist because the likely sale of a property will be above the number generated multiplying the Catastral value by the multiple. In fact if you declared at least this minimum amount there would never be a tax investigation which sort of encouraged under-declaration of sale prices by both parties to reduce tax liability (But that is another very long story) e.g. you might purchase for 250k on the above example but both parties in collusion agreed to declare 180k. This saved the buyer 7% of 70k, the difference between the real price and the declared price and the seller made a saving of capital gains, usually 18%! This was totally illegal, or rather slightly illegal, because under declaration by more than 30000 was a crime whereas any amount under 30000 was a misdemeanour, go figure!
Now the problem only comes up when somebody wants to sell a property in a falling market because the multiples have not fallen. We have the case at the moment on a sale where the Catastral Value times the multiple is more than the actual selling price of a property.
What does that mean?
Well, despite the owner selling for one price, the sale has to be declared at a higher price to avoid a tax investigation even though both parties have done nothing wrong and want to declare the full amount of purchase, (No black money involved at all). Their taxes are paid based on the higher declared price despite the lower price being the real price. If a price lower than the catastral value times the multiple is declared then the tax office fine both parties. You can then appeal but the process is long and arduous. You may eventually get the difference back.
Stupidity? Totally! But then the taxman always wants his pound of flesh doesn’t he?