Taxpayers must meet two deadlines to qualify for the exemption for reinvestment in a home under construction

Applying the exemption in Personal Income Tax (IRPF) for the reinvestment of the amount obtained from the sale of a primary residence requires strict compliance with temporal conditions. The Dirección General de Tributos (DGT) has specified the limits that individuals must observe when the destination of the funds is the construction of a new residence.

What the DGT has ruled

The ruling establishes that, to benefit from the exemption, the taxpayer must satisfy a double temporal condition linked to the regulations of the LIRPF and its Regulations:

• Reinvestment period: The entire amount received from the transfer of the primary residence must be applied to the construction of the new home within a period of two years, whether before or after the date of the sale.
• Completion period: The construction of the home must conclude within a period not exceeding four years from the start of the investment. This four-year period is calculated from the first payment made for the construction that is considered as the reinvested amount.

The regulations allow exceptions to the completion period only in cases of extensions due to exceptional circumstances.

What this means for you

If you have sold your primary residence with the intention of avoiding taxation by reinvesting the capital into a home under construction, it is not enough to simply start payments or the works. Compliance with the deadlines is an essential requirement for the Administration to accept the exemption. The calculation of the four-year period is critical, as it begins from the first disbursement intended for the works that is intended to be reinvested, which requires rigorous control of the dates of payments made to the builder or developer.

What you should do

It is necessary to perform detailed monitoring of construction schedules and payment calendars. Since the reinvestment period can be before or after the sale, financial planning must be precise to ensure that the entire amount is allocated to the construction within the prescribed two years. It is recommended to assess each particular situation to ensure that the construction process and the payments made strictly comply with the provisions of the IRPF Law and its Regulations.