Payments for constructing a new home must be made within two years

The application of the exemption for reinvestment in the construction of a primary residence requires strict compliance with time limits. It is not enough to have the intention to build; the financial execution and the completion of the work must adhere to the limits set by the Personal Income Tax (IRPF) regulations.

What the DGT has ruled

The Dirección General de Tributos (DGT) has specified that, to benefit from the exemption when selling a primary residence and building another, two simultaneous temporal requirements must be met:

• Reinvestment period: The entire amount obtained from the transfer of the previous home must be applied to the new construction within a maximum period of two years from the date of the sale.
• Completion period: The work must be completed within a period not exceeding four years from when the first payment intended for construction is made.

The criteria establish that any payment made outside the two-year limit following the transfer cannot be counted as a reinvested amount for the exemption.

What this means for you

If you are an individual selling your primary residence with the aim of building a new one and avoiding the payment of capital gains tax, you must plan your cash flow with precision. The main risk lies in the desynchronization between the sale and the payments to the builder. If the disbursements planned for the work are executed beyond the second year after the sale, that excess money will not be covered by the exemption, which will generate a tax obligation for the non-reinvested portion.

What you should do

It is necessary to maintain rigorous monitoring of the payment schedule and the start date of the investment. Since the four-year period to complete the work is calculated from the first payment made, managing construction timelines is as critical as managing the funds obtained from the sale. It is recommended to assess each particular situation to ensure that the entire capital is mobilized within the legal margins established in the IRPF Law and its Regulations.