8.2.6.1. Exemption for reinvestment in primary residence

Capital gains arising from the transfer of the taxpayer's primary residence may be exempt when the total amount of the transfer value is reinvested in the acquisition or renovation of a new primary residence.

Likewise, the taxpayer can obtain the tax benefit of the reinvestment exemption if he allocates the amounts obtained from the sale of the habitual residence to pay the price of a new habitual residence under construction, including the possibility of self-promotion.

In this case, for the reinvestment exemption to be applicable, the taxpayer will have to meet two deadlines: a period of two years to reinvest the amount obtained from the transfer and another period of four years to complete the construction from the start of the investment, acquiring ownership of the new home.

If external financing was used to acquire the transferred property, the total amount obtained from the transfer will be considered, exclusively for these purposes, as the transfer value less the principal of the loan pending repayment.

The taxpayer will be deemed to be transferring his or her habitual residence when it constitutes his or her habitual residence at that time or had been considered as such until any day of the two years prior to the date of transfer. 

Concept of habitual housing and rehabilitation

For tax purposes, the taxpayer's habitual residence is considered to be the building in which the taxpayer resides for a continuous period of at least three years.

However, it will be understood that the dwelling had a habitual character when, despite not having elapsed said period, the death of the taxpayer occurs or other circumstances occur that necessarily require the change of domicile, such as marriage, marital separation, job transfer, obtaining the first job or change of job or other similar justified circumstances.

For the acquired dwelling to constitute the habitual residence of the taxpayer, it must be effectively and permanently inhabited by the taxpayer himself, within a period of twelve months, counting from the date of acquisition or completion of the works.

For the purposes of the reinvestment exemption, the rehabilitation of a home is considered to be the acquisition of a home, and works on it that meet any of the following requirements are considered as such:

1. That these are subsidized actions in the area of housing rehabilitation under the terms provided for in Royal Decree 233/2013, of April 5, which regulates the State Plan for the promotion of housing rental, building rehabilitation, and urban regeneration and renewal, 2013-2016.

2. Those whose main objective is the reconstruction of the dwelling by consolidating and treating the structures, facades or roofs and other similar works, provided that the overall cost of the rehabilitation operations exceeds 25% of the purchase price if it had been carried out during the two years immediately prior to the start of the rehabilitation works or, otherwise, the market value of the dwelling at the time of said start.

   For these purposes, the proportional part corresponding to the land will be deducted from the purchase price or market value of the home.

Full or partial reinvestment

To apply the exemption for reinvestment, it is not necessary to use all the money obtained from the sale of the previous home, it being sufficient to apply for the same purpose money borrowed from a third party, either directly or as a result of subrogation in a loan previously contracted by the transferor of the property.

Therefore, in order to consider the reinvestment as completed, the entire purchase value of the new home will be taken into account, regardless of whether the amount has been paid or financed. 

In the case of partial reinvestment, only the proportional part of the capital gain that corresponds to the amount actually invested will be excluded from taxation.

Deadline for reinvestment

The reinvestment must be carried out, in one go or successively, over a period of no more than two years, counted from date to date, which may be not only after but also before the sale of the previous habitual residence.

The reinvestment will be deemed to be carried out within the term when the sale was made in installments or with a deferred price, provided that the amount of the installments is used for the indicated purpose within the tax period in which they are received.

When, in accordance with the provisions of the preceding paragraphs, the reinvestment is not carried out in the same year of the sale, the taxpayer will be obliged to state in the tax return for the year in which the capital gain is obtained his intention to reinvest under the conditions and time periods indicated.

Due to the state of emergency declared following the COVID-19 epidemic, the two-year period provided for reinvestment was suspended from March 14, 2020, the date of entry into force of Royal Decree 463/2020, until May 30, 2020.

Likewise, the period provided for in article 41 bis.3 of the Personal Income Tax Regulations, computed from when the dwelling ceased to be habitual until it is sold, has also been affected by the aforementioned suspension.

Failure to comply with conditions.

Failure to comply with any of the conditions will result in the taxation of the corresponding portion of the capital gain.

In such case, the taxpayer will impute the non-exempt part of the capital gain to the year in which it was obtained, filing a supplementary return-settlement, including late payment interest, and will file it within the period between the date on which the non-compliance occurs and the end of the regulatory period for the return corresponding to the tax period in which said non-compliance occurs.