Personal income taxation
The Supreme Court in its ruling of 10 October 2022 clarifies how the termination of a co-ownership is taxed for personal income tax purposes when the value of the property is updated.
The Personal Income Tax Law establishes that, in the termination of co-ownership, no change in ownership is producedor tax purposes nor are the values of the assets received by each of the co-owners updated. Therefore, the co-owners will receive the assets awarded in the termination with the original value, thus deferring the possible capital gain or loss to the future transfer.
The Supreme Court determines that, if with the termination of co-ownership (a property in this case) the full ownership of the property is awarded to one of the co-owners in exchange for a monetary compensation to the other, which is calculated considering the real value of the property, an alteration in assets is generated in the co-owner who receives the money, due to the difference between the compensation received and the acquisition cost of his part of the property and whose gain would be subject to Personal Income Tax (IRPF).
However, in these cases of termination of the co-ownership of real estate, the property transfer tax and stamp duty (ITPyAJD) does not apply, because for the purposes of this tax it is understood that there is no transfer, but only a specification of rights that were already held previously in co-ownership. This same interpretation is also given by the DGT in its consultation V2038-22, dated 21 September 2022.
The Regional Economic-Administrative Court of the Balearic Islands in Resolutions of 28 April and 31 May 2022 determines how the termination of co-ownerships of real estate is taxed in two different cases:
– The termination of a co-ownership arising from several inheritances, by virtue of which one of the co-owners receives a property in full ownership in exchange for cash and a share in other properties, is subject to the modality of stamp duty and not transfer tax, because as the Supreme Court concluded in its ruling of 30 October 2019, in this case the requirements of indivisibility, equivalence and proportionality are met.
– The award through a judicial auction of the full ownership of the property to one of its two co-owners is subject to transfer tax because the award is made by auction and not by agreement between the parties.