Taxpayers must reinvest the full sale proceeds into the construction of their new home

The application of the exemption in Personal Income Tax (IRPF) for the reinvestment of capital gains derived from the sale of a primary residence presents important technical nuances, especially when the destination of the funds is the construction of a new property.

What the DGT has ruled

The Directorate General of Taxes (DGT) has specified that, in order for the capital gain obtained from the sale of the primary residence to be exempt, two concurrent conditions must be met:

• Reinvestment period: The total amount obtained from the sale must be reinvested within a period of two years, either before or after the transfer of the property.
• Construction completion period: The construction of the new home must be completed within a maximum period of four years from the start of the investment.

Furthermore, the ruling clarifies that if ownership of the home is partial, the exemption will be applied proportionally to the percentage of the new home that is acquired. In this sense, construction execution costs, such as technical fees or licenses, are considered part of the reinvested amount as long as they are paid within the period and are attributable to the corresponding ownership percentage.

What this means for you

If you are an individual who has sold your primary residence and plans to build a new one to avoid taxation on the gain, it is not enough to simply allocate the funds to the construction. You must ensure that the cash flow and construction payments strictly adhere to the two-year period for reinvestment and the four-year period for the completion of the work. Failure to comply with these timelines could lead to the loss of the tax benefit.

What you should do

It is necessary to maintain rigorous monitoring of the construction execution deadlines and the payments made to professionals and administrations. Since the exemption can be applied proportionally in cases of shared ownership, it is fundamental to correctly document that the expenses attributable to the construction comply with the requirements of the IRPF regulations and the Personal Income Tax Regulations.