Companies changing the use of business properties to residential must regularize VAT

The change in purpose of a real estate asset has direct tax consequences on Value Added Tax (IVA). When a company acquires or renovates a property with a specific commercial objective and subsequently decides to market it as residential housing, an alteration occurs in the deduction regime for the tax incurred.

What the DGT has resolved

The Dirección General de Tributos (DGT) has clarified that, if the works carried out are not classified as rehabilitation, the sale of the properties as housing is exempt from VAT as it constitutes a second or subsequent delivery. In this scenario, if the initially intended use for the property was the exploitation of a different activity, such as apart-hotels, the change of use toward the sale of housing entails the obligation to regularize the VAT.

The resolution indicates that the regularization must be carried out following the regulations for investment goods and the rules for the rectification of deductions. This implies that the VAT the company deducted at the time of purchase or during renovations must be adjusted to the new destination of the property, which no longer allows such a deduction as it is an exempt operation.

What it means for you

For companies managing real estate assets, this criterion implies that the tax savings obtained through the deduction of VAT during the investment or construction phase may be reversed if the business model changes. If the property ceases to be used for an activity subject to VAT and moves to an exempt activity (such as the sale of housing), the administration will require the return of part of the deductions made.

What should be done

It is necessary to evaluate the allocation of the properties in the accounting and the impact of the projected changes of use on the business strategy. Before modifying the destination of an asset, one must analyze the time elapsed since acquisition and the volume of VAT incurred to quantify the fiscal cost of the regularization that the Administration will demand.