Exemption for reinvestment in main residence when the bare ownership is held

The Supreme Court in its ruling of 12 December 2022 addresses the taxation of capital gains in personal income tax after the sale of a property in which only the bare ownership was held and the person intends to take advantage of the exemption for reinvestment in the main residence.

The Personal Income Tax Law (IRPF) establishes that when a person sells his or her main residence and makes a gain, the gain will not be taxed in the IRPF if the funds obtained from the sale are used to buy another main residence for the taxpayer. A main residence is understood to be one in which the taxpayer resides for a consecutive period of three years.

The Supreme Court has ruled that in a case where the owner of a property sells it, having only owned the bare ownership in the period prior to the sale (within the previous three years), even if he has resided in the house together with the usufructuary during those three years, the aforementioned exemption cannot be applied.

The Supreme Court refers to an earlier judgment of 20 December 2018 in which it reached the same conclusion in a case where the house that was sold had been contributed to the community of property by one of the spouses, but less than three years had passed between then and the sale.

Transfer tax in the partial termination of joint-ownership

In its ruling of 19 December 2022, the Supreme Court analysed a case of termination of joint ownership between four joint owners of a property whereby two of them transferred their share to the other two in exchange for the latter taking over the outstanding mortgage loan.

The Supreme Court has determined that, in the case analysed, the termination of the joint ownership has only partially taken place, so that the transfer of ownership is not exempt from transfer tax. The court indicates that the law does not exempt these transfers from taxation even when there is a disproportion between what is transferred and what is received, or even if the property is indivisible.