Along with the characteristics and requirements seen in the previous article and which will determine whether or not to choose the method of purchase and sale of a property on hire purchase, it is important to bear in mind that the taxation of the operation will have a decisive influence on the type of hire purchase and sale chosen by the seller and buyer.

How is the hire purchase of a property taxed?

 

When carrying out this real estate transaction, it is necessary to take into account how it affects both buyers and sellers from a tax point of view.

Broadly speaking, the purchase and sale of a property on instalments is taxable:

1.- Seller

The seller of the property must declare the amount of the sale and purchase as a capital gain in the Personal Income Tax (IRPF). The fact that it is a purchase and sale in instalments offers the possibility of periodically paying this capital gain (temporary imputation of the personal income tax (IRPF)).

You will also have to declare and pay tax for the municipal capital gain (in this case it is necessary to take into account the modifications that have taken place recently with regard to this tax). The capital gain must be paid from the moment the property is handed over to the buyer.

2.- Buyer

The purchaser of the property must pay ITP (transfer tax) at the moment the property is handed over to him/her in a single payment, and the amount of this payment cannot be divided.

What is the taxation depending on how the hire purchase of the property is secured?

 

 

However, it is important to bear in mind that the taxation will be different depending on the choice of security for the real estate transaction:

1.- Hire purchase of real estate with suspensive condition.

 

As mentioned in the previous post, when a suspensive condition is established in the hire purchase, the acquisition of ownership of the property does not take place at the moment of delivery of the property but at the moment when the purchase price is paid.

Personal income tax (IRPF): The instalments paid by the buyer are considered by the buyer as payments on account of the total purchase price and are exempt.

In the event of non-payment of the instalments, the instalments already paid will be considered as compensation for  damages.

Capital gains tax: The obligation to pay capital gains tax only arises when the condition precedent is fulfilled, i.e. when the transfer takes place.

Transfer tax (ITP): As with capital gains tax, the obligation to pay ITP only arises when the condition precedent is fulfilled, i.e. when the transfer takes place.

2.- Hire purchase of property with a condition precedent.

 

In this type of hire purchase, possession is transferred before the full purchase price has been paid and it is established that, in the event of non-payment of the price of the operation, the purchase is cancelled and becomes null and void.

In this case, taxation will be as follows:

Personal income tax (IRPF): If the resolutive condition is met, i.e. the instalments are no longer paid, a refund of undue income will have to be requested, which has been taxed as a capital gain.

The compensation that corresponds in the event of fulfilment of the suspensive condition (the instalments paid to date), will be taxed as capital gains, but not from the transfer of the property, but from compensation.

Capital gains tax: A refund will be requested in the event that the resolutive condition is fulfilled, i.e. the instalments are not paid and the hire purchase is terminated.

Transfer tax (ITP): The same happens here as with capital gains tax, a refund will be requested if the condition for termination is fulfilled and the hire purchase is terminated.

And what happens if there is a reservation of title agreement?

 

At this point, special mention should be made of what happens in the event that the real estate transaction has a reservation of title agreement.

Personal income tax (IRPF): The amount of the instalments can be taxed as capital gains as they are obtained.

If the instalments are no longer paid, the amount that has been taxed as capital gains will have to be refunded by means of a refund of undue income.

The compensation that corresponds in the event of non-payment of the instalments of the hire purchase, this compensation corresponds to the instalments paid to date, this will be taxed as capital gains but not from the transfer of the property but from compensation.

Capital gains tax: A refund will be requested in the event that the instalments are not paid and the hire purchase is terminated.

Transfer tax (ITP): The same happens here as with capital gains tax, a refund will be requested in the event that the hire purchase is terminated.

Compensation for damages

A small mention should be made of the compensation for damages for non-payment of instalments that we have been discussing throughout the article. This is made up of a percentage of the amount of the instalments paid and is based on the tenancy of the property and the deterioration caused to it.

If you need help when buying or selling a property in instalments, please contact us.