Planning on giving your home to your children? There may be a better alternative
Imagine you are planning to move from your current house to a new one, and want to donate your current home to your children. You may be better off selling the house and giving your children the money.
Under this scenario you have the following fiscal costs:
Your child must pay donation tax (Impuesto sobre donaciones, ISD). Depending on the circumstances and the region of Spain the house is in, you may benefit for a reduction. In Andalusia, the first 120.000 euros cash given to your children for them to buy their first home will have a 99% tax reduction if they are under 35 years of age. If your child is disabled, the amount eligible for the deduction increases up to 180.000 euros with no age limit.
You will have to pay IRPF (income tax) as if you had sold the house. The difference between the purchase price and the sale value of your home will be subjected to capital gains, even though you have given the house away. You are exempt from this if you are over 65.
Best case scenario
You won’t be liable for IRPF capital gains in this scenario if you are over 65 years old and this is your primary residence, as the sale of your primary residence is exempt from capital gains, even if you aren’t planning to buy a new home.
The alternative : selling and donating the cash
If you are moving to a new home worth the same or more than your current home, you may be better off selling the old one and donating the money to your children. In this scenario:
IRPF capital gains obtained in the selling of your primary residence may be exempt from taxation when the total amount obtain from the sale is reinvested into the purchase of a new primary residence (or the repairs of one that will now be your primary home). If there is an outstanding mortgage on the house then capital gains is payable on the amount left once the capital of the mortgage has been paid off.
You can then donate the money from the sale to your children and let them purchase a house. The cost of donating the money will be similar to the cost of donating the asset (your old home).
ITP or IVA costs. The trouble is that your children will have to pay either ITP or IVA on the purchase of their new home.
If you donate your old home to your children and buy a new one, you will have to pay capital gains and donation tax on the value of the home. But under certain circumstances, if you sell your home and give them the cash, you can be exempt from capital gains. Your children then use part or all of the money to buy a new home, although they must then pay ITP / IVA on the house purchase.
Therefore, this scenario is only worthwhile if the cost of ITP/IVA is less than the tax savings on the IRPF.
Information given is for guidance purposes only. Your actual circumstances may vary. For personalised information please contact an independent financial professional.
Maria Luisa Cervantes is a chartered accountant and gestor practising from her offices in Garrucha. She is specialised in expat tax issues of all types. Contact her on 950106490, visit her website www.cervantesalarcon.com/en or email your question to email@example.com.