Construction non-payment: requirements to claim capital loss in Personal Income Tax

A recurring problem for taxpayers is the tax management of amounts paid for construction works that are not executed due to the contractor's insolvency. Faced with the doubt of whether these payments can be directly accounted for as a capital loss in the income tax return, the Dirección General de Tributos (DGT) has issued a decisive criterion regarding the timing of its imputation.

What the DGT has ruled

The DGT establishes that the amount paid for unfinished construction does not constitute an immediate capital loss. Instead, said amount represents a credit right against the contracting company. For this right to be transformed into a deductible capital loss in Personal Income Tax (IRPF), the circumstances provided for in article 14.2 k) of the LIRPF must occur. This includes scenarios such as:

• The effectiveness of a debt write-off within the framework of a refinancing agreement.
• The conclusion of insolvency proceedings.
• In the case of judicial enforcement proceedings, one year passing without the credit being satisfied.

Once the loss occurs under these assumptions, the amount must be integrated into the taxpayer's general taxable base.

What it means for you

If you have made payments for work that has not been carried out due to the builder's financial situation, you cannot deduct that money as a capital loss in the fiscal year in which the non-payment occurs. The regulations require that the credit right be effectively extinguished or that the legal insolvency deadlines and conditions be met. Attempting to account for the loss prematurely could lead to an incorrect settlement before the Tax Administration.

What you should do

It is necessary to monitor the legal and financial status of the contractor. You must verify whether the situation falls under insolvency proceedings, a debt write-off, or a judicial enforcement process. Deductibility will depend strictly on meeting the requirements of the LIRPF and Law 22/2003. It is recommended to assess each particular situation to determine the exact moment when the credit right allows for the imputation of the loss.