In October last year the Valencian government in its infinite wisdom (ie none) decided to raise purchase taxes on second hand property from 8% to 10%, immediately putting themselves at a disadvantage with other communities in Spain (Madrid dropped theirs to 6% in January for example). Let’s not even mention internationally. It was a stupid move that I described in depth on this blog post
Now my “head banging against a wall” has reached new levels. There is another new law, formulated on 8th of March but with effect from 1st of January 2014 (Go figure), again just for the Valencian Community (Valencia, Alicante, Castellón) which means that 10% might well not be the amount you pay when buying a property.
How does 27% grab you?
The new law is based on the Catastral Value of the Property. You “may” now pay tax on the Catastral Value multiplied by the coefficient for the area where you are buying (Every town has it’s own coefficient because the catastral values have not been revised in many places since the 1990’s.). What this means is that you either pay 10% tax (If that is the higher amount of the two) or you may have to pay a higher amount if the Catastral Value multiplied by the coefficient is higher and if the tax office then requests you pay the difference between the 10% you pay on the day and this amount. (There are exceptions so we “always” suggest not paying the higher amount initially to see if your house can be considered an exception)
I think a couple of examples will suffice to show you how it works. A client of ours found a great value flat near the beach in Valencia. The price paid was 40k so he had to pay 4,000 Euros in tax at 10%. However according to the Catastral Value the minimum declared price for the property would be 49,000 Euros, this despite the fact that the property was sold for the actual price of 40k. Therefore it is possible that the new owner will receive a complementary tax bill of 900 Euros to increase his tax to 4,900 Euros, a rate of 12.25%.
Not high enough for you?
How about this one then? A friend of mine bought a place for 95,000 Euros from a bank. Therefore he paid 9,500 Euros. However he got a total and utter bargain. The minimum price that the tax office consider real for this property is 267,000 Euros. And in this case he has actually received a demand from the tax office for the extra 17,200 Euros, an effective tax rate of 27%! He has appealed against the payment.
You can see the law here if you want to check it out. You will notice that there are certain exceptions. Those exceptions are important. One of the main exceptions is for houses on their own plot as opposed to houses on shared plots or apartments.
What Are We Doing About It?
As the title says, forewarned is forearmed. In order to know exactly how much tax you may have to pay on your purchase in the Valencian community we will be informing you of this on visits to any property you are interested in. When the Catastral Value multiplied by the Coefficient is above the simple 10% tax we will let you know. You may think, “I would never buy a property with over 10% tax”. However, bear in mind one thing, in the majority of the properties where this is the case it is because the properties are at bargain basement prices. As long as you are not hoping to buy and then flip the property for a profit quickly then these properties should still be considered. If you are looking to live in the property or rent it out you just need to know your total outlay to work out if it is worth your while or whether the percentage rental return justifies the investment.
From our point of view the law is ridiculous. When a country desperately needs people from abroad to purchase property and come and live in Spain it is totally bonkers. This is especially true considering the huge exodus from the country reported today with a large drop in the population (Take those figures with a large grain of salt). You would think that, like in Madrid, the regional government would be doing everything possible to encourage inward investment, not driving it away which is what this law will inevitably do. However we have a plan in place for you and it is totally transparent as we always are.
1) We will tell you in the case of every property if you may be charged more than 10% on the property you are interested in. (I can guarantee you that most other agents will not do this and most will not even be aware of this new law)
2) We will suggest alternatives if you think that any property with this issue may not suit you.
3) We can also find you property in other communities that do not have this retrograde law eg Catalunya, Andalucia, Murcia etc… that suit your requirements at our national site, The Spanish Property Network.
4) We will help you to find a lawyer to appeal any potential extra tax if applicable.
5) We will find properties where it is not an issue.
If you want to know any more about the new law or want some reassurance about any purchase that you may be doing at the moment or have done since the start of 2014 just get in touch.