Reinvestment exemption requires the new home to be used privately

The application of the reinvestment exemption in Personal Income Tax (IRPF) requires strict compliance with conditions regarding both the home being sold and the one being acquired. A recent binding ruling from the Directorate General of Taxes (DGT) has specified the scope of these requirements in scenarios involving recent residence and shared use of the new property.

What the DGT has ruled

The Administration has determined that, to benefit from the exemption provided in Article 38 of the IRPF Law, both homes—the transferred one and the acquired one—must be considered primary residences. Regarding the home being sold, it is considered a primary residence after three years of continuous residence. However, the DGT admits it can be considered primary if it is demonstrated to the Administration that circumstances exist that necessarily require a change of address, even if said period has not been met.

Regarding the new home, the criteria become more restrictive if there is a room rental activity. In this case, only the proportional part of the acquisition value corresponding to the part used privately, including the common areas of the home, can be considered as the reinvested amount.

What this means for you

If you plan to sell your residence to buy another and avoid paying tax on the capital gain, you must take two critical factors into account:

• The duration of your residence: If you have lived in your current home for less than three years, you must provide evidence justifying the need for the change of address so that the Tax Agency recognizes it as a primary residence.
• The use of the new property: If your intention is to acquire a home and rent out rooms in it, you will not be able to apply the exemption to the total purchase price. The tax benefit will be reduced proportionally to the area intended for rental.

What you should do

Before carrying out the operation, it is necessary to perform a proportionality calculation in case the new home has a mixed use. Likewise, it is fundamental to gather documentation proving the necessity of the change of residence if the three-year period of stay in the transferred home has not been completed.