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Personal Income Tax: Taxation of the extinction of condominiums

If you inherited a home together with your siblings and you want to dissolve the condominium, you need to know that if the value of the home is higher than when it was acquired, you will have to pay Personal Income Tax (PIT). In this post we tell you how this case is taxed in the income tax return.

 

What is the dissolution of the community of property or the extinction of the condominium?

A condominium or community of property involves the ownership of a property among several owners and the dissolution involves the transfer of ownership to one of the co-owners in exchange for a financial consideration.

Cases of extinction or dissolution of the condominium are very frequent in cases of divorce of couples who were in community of property regime or of heirs who acquired a property by inheritance.

According to the Civil Code of common law: no co-owner can be obliged to remain in the community and may request, at any time, the division of the common property.

 

How can the condominium be extinguished?

The way to extinguish the condominium depends on whether or not the owners agree on the value of the property or how to divide it up, for example. If they agree, they can go to the notary and formalise a deed of extinction of the condominium.

If there is no agreement, the court should be used and a lawsuit should be filed requesting the dissolution of the condominium.

 

How is the extinction of the condominium taxed?

The first thing to take into consideration is that the extinction of the condominium is not subject to Transfer Tax and Stamp Duty (non-residents) or municipal capital gains tax, as it is not understood that a transfer takes place, but simply that the rights of each co-owner are defined.

 

What happens with the PIT in the extinction of the condominium?

For several years the Tax Authorities considered that if the property, at the moment of extinguishing the condominium, has a higher value than when it was acquired, it generates a capital gain that should be taxed in the PIT.

Now, the Supreme Court, in a sentence of 10 October 2022, supports the criteria of the Inland Revenue and considers that if there is a capital gain, it must be declared, even if, in reality, there is no transfer of wealth.

Let’s look at an example: Pablo, Mario and Ana are siblings and inherit a house from their father in equal shares. The initial value of the property when they inherit it is 200,000 euros. Some time after the inheritance, they decide to dissolve the condominium and Ana keeps 100% of the property. The value of the property at that time has increased to 270,000 euros. In this case, the tax authorities consider that the increase in value of 70,000 euros should be taxed for PIT purposes.

In short, in these cases, a tax return will have to be filed, which is bad news for taxpayers who carry out this type of operation.

 

If this is your case, you will need the help of an expert advisor in the taxation of condominium extinguishments to study your case and analyse the taxation.