Cheap Property in Spain Becomes Easy Target for Tax Authorities

January 8, 2015

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 tax, 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 tax 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 based 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.

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A 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.

The 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.