Loss of earnest money as a capital loss for Personal Income Tax (IRPF)

The loss of an amount of money delivered as earnest money (arras penitenciales) has direct tax consequences on the income tax return. Following a recent resolution from the Directorate General of Taxes (DGT), the treatment of this scenario has been clarified when one of the parties breaches the sales contract.

What the DGT has ruled

The tax authority determines that the loss of earnest money or a deposit constitutes a variation in the value of the taxpayer's assets. Unlike other scenarios, this loss does not derive from the transfer of an asset, but from a change in the ownership of the funds due to a breach of contract.

The criteria establish that the change in assets occurs at the exact moment the buyer loses ownership of the money and the seller incorporates it into their assets. Therefore, this event must be treated as a capital loss that must be included in the general taxable base of Personal Income Tax (IRPF).

What this means for you

If you are the buyer and you lose the amount delivered as earnest money because you are unable to formalize the sale, that loss of money has an impact on your tax settlement. This is not a loss derived from the sale of an asset, but rather a reduction in your assets that allows for a reduction in the general taxable base.

For the seller, receiving this earnest money represents an increase in assets that must also be declared in accordance with current regulations, as the money becomes part of their property following the other party's breach of contract.

What you should do

In the event of a breach of contract resulting in the loss of earnest money, it is necessary to correctly document the event to prove the change in assets to the Administration. You must have the earnest money contract and documentation certifying the breach and the effective loss of the funds.

Since the tax treatment depends on the exact nature of the operation and the timing of the loss, it is necessary to assess each particular situation to ensure that the inclusion in the taxable base is carried out correctly.