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V2127-20 25 June 2020 · SG de Impuestos sobre la Renta de las Personas Físicas Criterion in force
IRPF · comunidad de propietarios

Compensation for construction defects treated as capital gains if exceeding repair costs

A homeowners' association has requested clarification on how to tax compensation received following litigation over construction defects and whether legal fees can be deducted. The Directorate General of Taxes (DGT) ruled that the compensation constitutes a capital gain if it exceeds the cost of repairs, and that procedural expenses cannot be deducted.

The question raised

Tax treatment in Personal Income Tax (IRPF) of the compensatory amounts received, the tax year to which the received compensations must be imputed, and the treatment of the fees of the lawyer who represented the association in the litigation.

The DGT's ruling

The compensation received by a homeowners' association is attributed to the co-owners as a capital gain or loss. A capital gain shall only be computed if the amount received exceeds the cost of the repairs compensating for the damage. In the event of a gain, it must be imputed to the tax year in which the payment agreement is reached. Legal fees may not reduce the amount of the compensation for the purpose of calculating the gain.

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