Taxpayers must meet two deadlines for the exemption on reinvestment in construction

The application of the exemption for reinvesting the proceeds from the sale of a primary residence into the construction of a new home raises doubts regarding the permitted time limits. The Dirección General de Tributos (DGT) has specified the temporal requirements necessary for this tax benefit to be effective.

What the DGT has resolved

For a natural person to benefit from the exemption provided in Article 38 of the Personal Income Tax (IRPF) Law when constructing a home, they must satisfy a double temporal condition:

• Reinvestment period: The amount obtained from the sale of the previous home must be applied to the construction within a period of two years, whether before or after the transfer of the sold home.
• Completion period: The work must be completed within a period not exceeding four years from the start of the investment.

The ruling emphasizes that any payment made outside the two-year period counted from the transfer of the home cannot be considered a reinvested amount. Likewise, the four-year period for completing the work begins from the first payment that qualifies as a reinvested amount.

What this means for you

If you have sold your primary residence with the intention of building a new one, it is not enough to simply allocate the funds to the construction; you must strictly control the payment schedule and the completion of the project. If you make disbursements for construction outside the two-year margin following the sale, those amounts will not count toward the exemption, which could increase your IRPF tax burden.

What you should do

It is necessary to maintain rigorous monitoring of the sale deed dates and the payments made to the construction company or suppliers. Compliance with both milestones—reinvestment within the two-year period and completion of the work within four years—is decisive for the correct application of IRPF regulations. It is recommended to assess the particular situation of each construction project to ensure that cash flows align with the legal requirements.