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What is the Capital Gains Tax and How is it Calculated - A capital gain is a change in equity caused by an alteration in it, such as the purchase or sale of a home.
The best known situation in relation to capital gains is the one that occurs with the sale of a home, which is something that occurs frequently and habitually in our country.
As this is a case that occurs frequently, it is important to know how to calculate capital gain, how to pay taxes on capital gain and what difference they have with income from movable capital. With this information we will face the operations in a safer way and aware of the expenses that we will have to assume.
How to calculate capital gain?
As we already know, capital gain is the change in equity due to the purchase or sale of a home.
To calculate the capital gain, the price at which the property was purchased and the amount of the sale must be taken into account.
From here it will be necessary to distinguish two different situations depending on the date on which the capital gain occurred.
To calculate capital gains accrued up to December 31, 2014:
- The acquisition value would be made up of the acquisition or inheritance value. To this will be added the expenses and taxes derived from the operation, excluding interest. An update coefficient will be applied to this total, regulated annually in the General State Budget.
- The transfer value would be made up of the value of the sale of the property less the expenses and taxes derived from the operation, provided they were paid by the seller.
To calculate capital gains accrued since January 1, 2015:
- The acquisition value, as in the previous case, will be made up of the real value for which the property was acquired, to which the taxes and expenses related to the purchase will be added, except interest.
In addition, if the property had been rented, this value will be reduced in proportion to the amortizations.
- To calculate the transfer value, the amount of expenses and taxes paid by the seller must be subtracted from the actual amount of the sale, in the same way as in the previous case.
Therefore, the general formula used to calculate the capital gain after the sale of a property will be the following:
Equity gain = (Acquisition value + expenses) – (Transmission value – expenses)
How to tax capital gains?
The Spanish tax system is quite broad, so most of the transactions or movements in our income or assets will be subject to tax.
When we sell or buy a property for our assets, different tax obligations are generated for the seller and buyer derived from the sale and purchase operation and that translate into tax payments and other expenses.
One of the most important expenses, although it is not considered a tax, is the amount that must be paid for the change of owner in the public deed. This is a procedure that will be carried out before a notary, will be liquidated and registered in the property registry.
Regarding taxes derived from the sale of a property, the buyer will have to pay the Patrimonial Transfer Tax and Documented Legal Acts and the seller will have to take charge of the Capital Gains established by the City Council of the town where the property is located. In addition, the seller must also pay the personal income tax (IRPF) on the capital gain.
When a flat or a house is sold, the money received by the seller is part of the so-called capital gains and losses.
Therefore, the amount obtained must be taxed in personal income tax. This tax is of a progressive type, so the percentage that will be applied will depend on the profits obtained. Currently the scale of application of percentage rates for capital gains is as follows:
- Up to 6,000 euros a fixed rate of 19% will be paid.
- From 6,000 euros to 50,000 euros the rate will be 21%.
- From 50,000 euros to 200,000 euros the applicable percentage is 23%.
- From 200,000 euros, a new percentage is added this year, which will be 26%.
As we can see, being a progressive tax, the percentages increase as the price of the profit increases. Therefore, the amount to be paid corresponding to this tax will be significant in homes that have a high sale price and will not be significant in a lower-priced apartment.
In order to pay the Personal Income Tax on the sale of a home, it will be necessary to enter all the data related to the operation, as well as the profit or loss that has been obtained with the transfer of the property.
As a general rule, the gain or loss will be calculated by the difference between the transmission and acquisition values. In other words, the important values when it comes to paying income tax will be the price at which the property has been sold and the price at which it was purchased.
The transfer value refers to the real amount for which the property has been sold, including in this amount the sale price and subtracting the expenses and taxes derived from the operation, such as municipal capital gains.
When the situation arises in which the declarant has acquired a home with a mortgage loan, the total value of the transfer is considered to be the amount of the sale minus the amount of the loan pending repayment.
Regarding the acquisition value, this is made up of the amount for which the property was purchased, to which will be added all the expenses and taxes that have a direct relationship with the purchase or inheritance, if applicable.
VAT and Property Transfer Tax are usually included, while interest and the cost of investments or improvements made to the home are excluded.
Amortizations must be subtracted from the sum of the aforementioned items if the home was rented during the time the tax subject was the owner, reducing the total income received from the rental.
In addition to personal income tax, the other main expense in the form of a tax is the payment of the Tax on the Increase in the Value of Urban Land, better known as Plusvalía. The purpose of this local tax is to tax the increase in value that occurs in a property over time. Its payment is mandatory in all cases in which a property is transferred, except in cases in which there have been no profits in the transmission.
To calculate it, you must take into account the cadastral value, the time that the property has been owned, the tax rate and the applicable annual percentage.
The cadastral value of the land can be consulted on the IBI receipt and the annual update percentage and the corresponding tax rate will be applied to this amount.
These two percentages are established by each City Council, since it is a local management tax, so the amount to be paid as Capital Gains will depend to a large extent on the place where the property is located.
Difference between capital gain and return on movable capital
To apply everything seen above, it is important to distinguish between capital gains and returns on movable capital to identify whether or not it is necessary to pay certain expenses and taxes.
Capital gains and losses are considered those variations in the value of the taxpayer's patrimony that occur due to changes in its composition, unless the Personal Income Tax Law classifies them as income.
More specifically, capital gains occur in the following cases:
1. When there is an exit of patrimony assets due to their transfer. In this case, the gain or loss will be calculated, as we have seen, by the difference between the acquisition and transmission values.
2. When there is an incorporation of assets to the patrimony. As an example of this we can highlight the obtaining of a prize. The valuation of the capital gain will be the market value of the assets that are incorporated.
According to the provisions of the Personal Income Tax Law in its articles 33.1 and 33.2, for a capital gain or loss to occur, the following requirements must be met:
- There must be an alteration in the assets that make up the patrimony of the taxpayer.
- That, due to the alteration produced, a change in the value of the taxpayer's assets has been generated.
- That the profit is not an exception that is expressly included in a legal norm or that said norm makes it taxable as income instead of as profit.
The most common examples of capital gain or loss are the following:
- Derivatives from the sale of a property, home or similar.
- Those generated by the sale of shares and other similar titles.
- Those generated by the sale of investment funds.
- Any other that meets the requirements mentioned above.
On the other hand, the income from movable capital is regulated in articles 25 and 26 of the Personal Income Tax Law.
We understand by income from movable capital any consideration, regardless of its name or nature, that comes directly or indirectly from movable capital or from any asset or right not classified as real estate.
Movable capital is that which is made up of movable assets. We understand movable assets to be those that can be easily moved from one place to another.
They are considered as full income:
Yields obtained by participating in own funds of any type of entity:
- Los dividendos
- Meeting attendance premiums
- Shares in the profits of any type of entity.
Returns obtained from the assignment to third parties of own capital:
- Interest and any other form of remuneration agreed as remuneration for such transfer.
- Those derived from the transmission, reimbursement, amortization, exchange or conversion of any class of assets representative of the collection or use of foreign capital (bonds, debentures, bills, etc.).
- Income from capitalization operations, from life or disability insurance contracts, unless they must be taxed as work income (group insurance that implements the pension commitments assumed by companies) or in the ISD, and income derived from the taxation of capital .
- Other income from movable capital. This heading includes a list of unrelated cases, such as those derived from intellectual property that does not belong to the author, industrial property, the provision of technical assistance, leasing of movable property, businesses and mines, and those from the assignment of the right to the image or the consent or authorization for its use.
Los ejemplos más comunes de rendimiento del capital mobiliario son:
- Current accounts and deposits.
- Stock dividends.
- Fixed income securities coupons.
- Transmission or amortization of fixed income securities.
- Life or disability insurance.
The main difference between the capital gain and the return on movable capital lies in the fact that the gains in the former are obtained by the transmission or incorporation of elements into the taxpayer's patrimony.
In the second, on the other hand, returns are obtained from the property itself, not from its transmission.
As we have seen, the capital gain is that alteration in the taxpayer's patrimony that produces benefits for him. To calculate it, as a general rule, the difference between the acquisition price and the transfer price is calculated.
Both may include the expenses and taxes derived from the operation. The person who sells a home has the obligation to pay taxes mainly on personal income tax and municipal capital gains. The first will apply variable percentages depending on the value and in the second the rate applicable to the cadastral value will be established by each City Council based on the time that the property has been owned.
