Do property taxes differ between the Balearic Islands?

Every week, Mansion Global asks a tax question to an estate tax attorney. Here is this week’s question.

Q: I am looking to buy a house in Spain Balearic IslandsIs there a difference between the islands when it comes to property taxes on purchases?

A: The property taxes on all the Balearic Islands are the same. The Spanish archipelago includes the large islands of Mallorca, Menorca, Ibiza and Formentera, as well as islands and smaller islands such as Cabrera, Dragonera and Espalmador.

When you buy property on the islands, you will pay VAT [value added tax] “Transfer tax,” said Leon Fernando del Canto, president of Del Canto Chambers, a London-based international tax legal team.

Newly built properties purchased directly from the builder are subject to a one-time payment of flat VAT of 10% of the total value of the property, as well as an additional one-time 1.5% stamp tax, for a total tax of 11.5% of the property value.

Resold properties are subject to an expandable transfer tax of between 8% and 11.5%.

Property valued at less than €400,000 ($420,000 USD) is taxed at 8%; Real estate between 400,000 and 600,000 euros at 9%; Real estate between 600,000 and 1 million euros at 10%; and real estate over 1 million euros by 11.5%.

The tax is calculated in ranges, so a buyer who spends €720.00 on a property owes €62,000 in one-time purchase taxes, of which the first €400,000 will be taxed at 8%, the next €200,000 at 9% and the final €120,000 at 10%.

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Property owners are also required to pay annual property taxes, which take three different forms. The first is the annual Town Hall rate (known as the IBI), which is determined by the estimated value of the local Land Registry office – often less than the sale price. This tax applies to all property owners. For apartments, they rarely exceed 1,000 euros per year and house prices range from 1,500 euros to 4,000 euros per year, depending on the age and registered value of the property. There is also an annual garbage handling tax of between €200 and €400.

“If you are a non-resident, you also pay income tax and property wealth tax,” Mr. Del Canto said.

Second home owners – including anyone who is not permanently resident in Spain – must pay an additional annual tax, referred to as income tax. “It is a fixed amount and depends on the cadastral value of the property. It’s 1.1% of the cadastral value, so you pay 24% of that number. “This tax doesn’t exist in any other country, so you don’t have an exemption from a double taxation agreement.”

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So if the property has a value of €400,000, the non-resident owner will owe €1056 in income tax. If the landlord rents out the property, all rental income will also be taxed, minus any financial costs such as mortgage taxes and operating costs such as utility bills.

Finally, owners of properties worth more than €700,000 must pay the annual wealth tax, which can be as high as 3.45% for properties worth more than €10 million. However, in some cases, double taxation treaty instruments or certain corporate structures can mean that the wealth tax has been reduced or eliminated. It is worth checking with a local financial advisor to confirm how much wealth tax is owed and whether there are legal loopholes that apply.

Click to read Tax experts share answers and tips to readers’ pressing tax questions

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