Taxpayers will lose the reinvestment exemption if construction payments are made after two years

The application of the exemption in Personal Income Tax (IRPF) for the reinvestment of capital gains obtained from the transfer of a primary residence requires strict compliance with legal deadlines. A recent binding ruling from the Dirección General de Tributos (DGT) has specified the time limits for the construction of a new home to allow for the avoidance of taxation on the gain.

What the DGT has ruled

The advisory body determines that, to benefit from the tax relief provided for in Article 38 of the IRPF Law, two essential temporal conditions must be met:

• Application of the amount: The entirety of the money obtained from the sale of the previous home must be applied to the new investment within a maximum period of two years.
• Completion of the work: The construction of the new home must conclude within four years from the start of the investment.

The resolution emphasizes that any payment made to the construction company or suppliers that is carried out outside the two-year limit counted from the transfer of the previous home will not be considered a reinvested amount, which could invalidate the exemption on the proportional part of the non-reinvested gain.

What this means for you

If you are an individual who has sold your primary residence—for example, in a process of terminating co-ownership—and intends to build a new residence, monitoring cash flows is decisive. It is not enough to start the work; it is necessary that the capital destined for said construction is disbursed in full within the two-year period established by the regulations.

If payments are fragmented and part of them are made after that period has elapsed, the Administration will consider that this fraction of the amount has not been reinvested, forcing the taxpayer to pay tax on the capital gain corresponding to that excess.

What should be done

It is necessary to carry out rigorous monitoring of the payment schedule and the execution of the work to ensure that both the deadline for reinvesting the funds and the deadline for the completion of the construction are met according to the IRPF Regulations. It is recommended to assess the financial planning of the work so that disbursements coincide with the legal limits and to avoid contingencies with the Tax Agency.