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Cheap Property in Spain Becomes Easy Target for Tax Authorities

1 min readBy: Gavin Ekins

Many expats have moved to Spain, lured by inexpensive housing and a mild climate. The struggling Spanish housing market has offered good deals and bargaining opportunities in prime vacation and retirement areas.

The bargain-seeking foreigners may have gotten a deal on the house but not on the taxes. The cash strapped Spanish government has declared that the property sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. , known as Impuesto de Transmisiones Patrimoniales (ITP), should be levied on the government’s estimates of the houses’ values and not on the actual sales prices.

The Spanish taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. authority has started to comb through the sales records of houses to find purchases where the official home value is different from the sales price. The tax authority has sent out tax bills for the difference, including interest for delayed payment. This has left many homeowners in Spain with a nasty surprise.

Does the Spanish government believe that the new homeowners did not pay their fair share? Unlikely. If this were the case, the Spanish government would have implemented a tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. d on the characteristics of the house rather than the sales price.

Politicians want to raise tax revenues while not angering voters, a difficult feat for most governments. Expats, although residents of the country, are not citizens and cannot punish the local politicians in the polls for raising taxes. Thus, taxing primarily expats increases revenue without angering Spanish voters, a Spanish politician’s dream come true.

The Spanish government may see this as a win, but there are unintended consequences on the horizon. Such a change in policy will undoubtedly leave many homeowners with a bitter taste in their mouths. This becomes a warning to prospective homeowners and may reduce demand further in an already depressed housing market, ultimately reducing the revenue they hoped to increase.