Do property taxes vary between the Balearic Islands?

Every week, Mansion Global poses a tax question to real estate tax lawyers. Here is this week’s question.

Q: I am looking to buy a house on one of the the Balearic Islands— is there a difference between the islands when it comes to property taxes on a purchase?

A: Property taxes on all the Balearic Islands are the same. The Spanish archipelago includes the large islands of Majorca, Menorca, Ibiza and Formentera, as well as smaller islands and islets such as Cabrera, Dragonera and S’Espalmador.

“When you buy property on the islands, you pay VAT [value added tax] or transfer tax,” said Leon Fernando Del Canto, head of Del Canto Chambers, a London-based international tax and legal team.

New build properties purchased directly from the builder are subject to a one-time VAT flat rate payment of 10% of the total property value, plus an additional one-time stamp duty of 1.5%, for a total tax of 11, 5% of property value.

Resale goods are subject to an evolving transfer tax of between 8% and 11.5%.

Properties worth less than €400,000 (US$420,000) are taxed at 8%; goods between €400,000 and €600,000 at 9%; properties between €600,000 and €1 million at 10%; and buildings over €1 million at 11.5%.

The tax is calculated in installments, so a buyer who spends €720.00 on a property will owe €62,000 in one-time purchase taxes, since the first €400,000 will be taxed at 8%, the next €200,000 at 9% and the last €120,000 at 10%.

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Homeowners are also required to pay annual property taxes which take three different forms. The first is an annual rate from the town hall (called IBI), which is determined by the estimated value of the property by the local cadastral office, often lower than the sale price. This tax applies to all owners. For apartments, it rarely exceeds €1,000 per year and for houses, it varies from €1,500 to €4,000 per year, depending on the age and the registered value of the property. There is also an annual waste disposal fee of between €200 and €400.

“If you’re a non-resident, you also pay income tax and wealth tax on the property,” Del Canto said.

Owners of second homes, including anyone not permanently residing in Spain, must pay an additional annual tax, called income tax. “It’s a fixed amount and it’s based on the cadastral value of the property. It is 1.1% of the cadastral value, and of this figure you pay 24%,” he said. “This tax doesn’t exist in any other country, so you don’t get relief from the double tax treaty.”

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Thus, if a property is worth €400,000, the non-resident owner will owe €1,056 in income tax. If the landlord rents the property, all rental income will also be taxed, minus financial charges such as mortgage taxes and running costs such as water and electricity bills.

Finally, owners of property worth more than €700,000 must also pay an annual wealth tax, which can reach 3.45% for property worth more than €10 million. However, in some cases, the tools of double tax treaties or certain business structures may mean that wealth tax is reduced or eliminated. It is worth checking with a local financial adviser to confirm the amount of wealth tax due and whether any loopholes apply.

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