When selling a property, whether it is a house or a plot of land, the capital gain or loss is calculated by comparing the acquisition value and the realisable value. In addition, any investments and improvements made to the property increase the acquisition value and therefore reduce the capital gain realised by the taxpayer. Many taxpayers understand these investments and improvements in the broadest sense, as they assume that all remodelling or refurbishment work carried out on the property can be considered as such. And that such work serves to increase the acquisition value and reduce the amount of the capital gain. However, the opposite is the case, as we will see below.

Renovation of a property: what does the tax authority consider to be repairs, investments and improvements? First of all, it should be noted that the tax authorities make a clear distinction between repairs and investments and improvements and only the latter may increase the acquisition value of the property for the purpose of calculating the capital gain.

Article 35.1.b) of the Income Tax Act assumes that the acquisition value of a property includes “the cost of investments and improvements made to the acquired property, as well as the costs and taxes associated with the acquisition, with the exception of interest paid by the purchaser”. The costs of repair and maintenance work are therefore not taken into account. . It is therefore of interest to know what repair and maintenance work is and what investments and improvements are.

The tax office assumes that maintenance and repair costs are those that are regularly incurred in order to maintain the normal use of the material goods, such as painting, plastering or repair work on installations”. And also “the cost of replacing elements such as heating systems, lifts, security doors or others, the cost of replacing old electricity distribution boards, replacing old windows, replacing old pipes and taps, the cost of laying tiles and flooring in bathrooms and kitchens, replacing worn parquet flooring and fitting new skirting boards, the cost of repairing doors, painting work, taking rubble to landfill and final cleaning of the office, etc.”.

What are investments and improvements? The Tax Agency has restricted the concept of investments and improvements, practically reducing it to a minimum. To do so, it refers to various resolutions of the Spanish Institute of Auditors (ICAC). It follows the opinion of this Institute that “in the absence of a specific definition in the regulation itself, extensions or improvements should be understood as real investments that result in an extension of the useful life or habitability of the property or an increase in the extension or capacity of other types of assets, as considered in the general accounting plan, and only these costs of improvements or extensions to fixed assets should be taken into account for income tax purposes as a higher amount of the acquisition value”.
At this point, it is noticeable that the Ministry of Finance is making an innovation that is not provided for in the regulation, using a concept of expansion and improvement from the accounting regulations to apply it to taxpayers who are not entrepreneurs or traders, but merely transfer a property they own in a transaction that has nothing to do with an economic activity.

What happens during property renovation when obsolete elements are removed and more modern ones installed?

It may be logical to consider the replacement of a damaged element with an identical one as “conservation” work. But not if the installed element is much more modern and has technologies, features and functions that the replaced element did not have. This applies to doors, windows, air conditioning systems, parquet floors, flooring, which are obviously an improvement and not simply a “repair or conservation” of the existing one. There is no doubt that the property is in a much better condition after such work than before, and this is not achieved with simple repair and conservation work.

This is not contradicted by the fact that there is no element on the market that is equivalent to the one it replaces, simply because time passes. Even if this is the case, it still depends on whether the new element improves on the replaced element due to its built-in features and puts the property in a much better condition than before the work began.

Work similar to renovation work

Structural adaptations that provide the building with structural safety conditions to ensure its stability and mechanical resistance; the reinforcement or adaptation of foundations and the treatment of pillars or slabs; the extension of the built-up area above and below ground; the reconstruction of facades and courtyards; the installation of lifts, including those designed to overcome architectural barriers for use by disabled people, are also considered works similar to refurbishment.

So, is it enough to state that a “holistic reform” has been carried out or that the flat has been completely renovated to be understood as an upgrade of the property?

In view of the above, it can be concluded that it is not sufficient for the taxpayer to state that a complete renovation has been carried out or that the dwelling has been demolished and refurnished in order to consider that the renovation work carried out on a property represents a higher acquisition value of the property.

For this reason, the TEAC (Central Economic and Administrative Court, which reports to the Ministry of Finance) states in its most recent decision of 25 September 2023: “The blanket statements of having carried out a “reform”, “integral reform” or other designations do not automatically mean that it is an extension or improvement. The conclusion must be drawn in a detailed case-by-case analysis of the extent to which these works or interventions fit into the conceptualisation just outlined. “The TEAC also points out that in cases where the reform consists of demolishing and rebuilding the property, remodelling the partitions and the spaces that the property had in its original configuration, the TEAC considers that “without an increase in living space, the mere remodelling of the available space cannot, in principle, be classified as an improvement; Such remodelling, with the elimination or extension of spaces, responds to the needs, comfort, taste, in short, the subjectivity of the person who makes it, without this implying per se an increase in the productivity associated with the property. “

What evidence do I need to provide to prove extension and improvement works that increase the value of the property for the purpose of calculating capital gains or losses?
It must be demonstrated that such an investment leads to a measurable increase in the productivity of the property, which is reflected in an increase in the income generated:

• The presentation of a building permit, an approved project, an itemised budget and not just invoices listing “various materials” without showing what purpose or use they served, makes it difficult to classify these expenses as investments and improvements.
• Photographs showing the “before” and “after” of the renovation carried out have probative value “insofar as they confirm or illustrate the work described and quantified in the corresponding project, budget and invoices”. However, they have no probative value if there is no project or estimate detailing the work carried out. In addition, the photos must be very detailed and clearly show the result of the work carried out, even for someone who does not know the property.

In conclusion… a piece of advice that we at Omnia Consulting can give you:
As you can see, the tax authorities have created a veritable minefield in order to avoid taxpayers considering all amounts intended for the reform and refurbishment of the property as a higher acquisition value and reducing the capital gain. It is therefore advisable to be careful and prudent from the outset and to collect the evidence and supporting documents that, in the event of a review, will serve to confirm that the actual investment and improvement works have been carried out. In this sense, and to facilitate our defence, the following advice may be useful:

1. document the renovation works carried out in order to avoid future problems with the tax authorities by requesting cost estimates and projects, duly itemised and highlighting the innovative nature of these works compared to the original state of the property.

2. avoid general terms in the invoices and try to describe the extent to which the work carried out on the property improves the initial situation that existed before the work began.
3. for works that consist of demolishing the existing partitions and completely reorganising the originally existing rooms and spaces, this innovative and improving character should focus, for example, on increasing the number of rooms, bathrooms or even building spaces that were not there before (e.g. a kitchen if it was not there before). To the extent that existing spaces are remodelled, increasing the floor area of spaces such as the kitchen or bathrooms may be evidence of the reconstruction of these spaces rather than their mere renovation, which would constitute an expense for maintenance and repair.