Hidden defects: how compensation for repairs affects capital gains

In the context of property transfers, situations arise where, after the sale is finalized, the buyer detects defects that were not visible at the time of signing. Resolving these conflicts through the payment of an amount for repairs has a direct consequence on the settlement of Personal Income Tax (IRPF).

What the DGT has ruled

The Dirección General de Tributos (DGT) has clarified the impact of these payments on the determination of capital gains or losses. The criteria establish that the amount paid to the buyer for the repair of hidden defects must be considered a reduction in the sale price, in accordance with the provisions of Article 1,486 of the Civil Code.

As this constitutes a reduction in the value of the transaction, this concept impacts the calculation of the transfer result. However, the administration conditions this treatment on the fulfillment of certain requirements:

• Proof of the actual existence of the hidden defects.
• A direct correspondence between the detected defects and the economic amount paid.
• The use of evidence admitted under Law to validate the operation.

It is important to note that the assessment of the veracity and sufficiency of such evidence falls to the tax management and inspection bodies.

What it means for you

If you have sold a property and subsequently had to pay an amount to the buyer to remedy hidden defects, this expense should not be treated as a generic expense, but rather as a decrease in the sale price. This can result in a reduction of the taxable capital gain or, where applicable, an increase in the capital loss.

This adjustment is relevant for the correct determination of the taxable base in your tax return, avoiding an excess in tax payment for a gain that, in practice, has been lower due to the payment made.

What you should do

In such a situation, it is fundamental to document the transaction exhaustively. The administration will require evidence linking the defect to the payment made. It is recommended to have technical documentation and proof of payment that allow for the demonstration of the nature of the operation and its relationship with the original purchase and sale agreement.

Since the assessment of evidence is the responsibility of the tax inspection, each situation must be analyzed carefully to ensure that the applied treatment is correct according to current regulations.