Taxpayers cannot apply the reinvestment exemption if the property was not their habitual residence

The application of the reinvestment exemption in Personal Income Tax (IRPF) requires strict compliance with temporal and residency requirements. A recent resolution from the Directorate General of Taxes (DGT) delimits the scope of the habitual residence condition necessary to benefit from this provision.

What the DGT has ruled

The inquiry analyzes whether a property can be considered habitual for the purposes of the reinvestment exemption provided for in Article 38 of the IRPF Law, even if the taxpayer no longer resides in it. The tax authority's criterion is categorical: for the transfer of a property to allow the application of the exemption, said property must have been the habitual residence at the time of sale or must have been so on any day during the two years immediately preceding the transfer.

In the case analyzed, the taxpayer had moved their residence to another city prior to the sale, meaning they did not meet the habitual residence requirement either on the date of the transaction or within the previous two-year period. The DGT clarifies that the exceptions provided in the Regulations for changes of address only operate when the three-year period of continuous residence has not been reached, but they do not eliminate the need to have maintained the status of habitual residence within the established timeframes.

What this means for you

If you plan to sell a property to reinvest the proceeds in the acquisition of a new residence, you must precisely verify your residency history in the sold property. It is not enough for the property to be part of your assets; the regulations require a link of effective and continuous residence.

If you stop residing in your current home and more than two years pass before you carry out the sale, you will lose the right to apply the reinvestment exemption, even if the money is used entirely to purchase a new home. This implies that the capital gain derived from the sale will be taxed under IRPF in the ordinary manner.

What you should do

Before formalizing the transfer of a property with the intention of reinvesting the capital, it is necessary to:

• Confirm that the transferred property has been your habitual residence at the time of sale or during the previous two years.
• Verify if the change of residence occurred within the timeframes permitted by the Regulations to avoid losing this benefit.
• Assess the tax situation of the operation to avoid surprises in the tax settlement.

Every residential mobility situation is different, so it is recommended to analyze residency timeframes on an individual basis.