As is well known, the donation of real estate is a transaction that has an impact on personal income tax, in accordance with the rules set forth in Article 33 of Law 35/2006. In the cases in which, when a property is donated, a loss is produced, this loss will not be computed and cannot be included in the taxable base of the Personal Income Tax.
Article 33.5 of Law 35/2006 provides as follows:
The following shall not be computed as capital losses:
a) Those not justified.
b) Those due to consumption.
c) Those due to lucrative transfers by “inter vivos” acts or liberalities.
This approach to donations in Personal Income Tax had been accepted without discussion until the pronouncement of the Regional Economic-Administrative Court of Valencia.
The Regional Economic-Administrative Court of Valencia has declared on the taxation of donations in the Personal Income Tax that taxpayers who lose money with the donation of a house will be able to compensate this loss in the Personal Income Tax with the profits obtained that year and in the following four years. This administrative criterion goes against the opinion of the tax authorities, who have been denying the existence of a capital loss in these cases.
It opens a possibility of tax savings in donations.
It faces the one maintained until now by the Treasury, which had been denying the existence of a capital loss in the case of gratuitous transmissions. Now taxpayers see open the possibility of benefiting from an important tax saving.
The Valencian court considers, with regard to the taxation of donations in the IRPF, that in the case that a property is given as a gift for a lower value than the purchase value, it is possible to declare a capital loss in the IRPF, in order to compensate such losses with the gains.
The basis of the resolution of the Regional Economic-Administrative Court of Valencia is in the difference between what we can call economic loss and tax loss.
When an asset is donated we cannot say that, from an economic point of view, there is an economic loss, since an asset leaves the donor’s estate and no other asset enters in consideration. However, one thing is the economic loss and another is the tax loss, generated by the difference between the acquisition value and the donation value of the asset.
What to do if we donate an asset for less than its acquisition value?
At this point it is necessary to consider what can be done if, especially in these times of crisis that we are going through, we donate an asset for a lower value than the acquisition value. The first thing to do is to review the values of acquisition and donation, to see if there has really been a loss. If there has been a loss, the donor will have to request a rectification of the self-assessment of the Personal Income Tax corresponding to the fiscal year in which the donation was made and initiate a procedure of refund of undue income before the State Agency of the Tax Administration. The term to be able to request the rectification of the self-assessment is 4 years. Therefore, at this moment, only the review of donations made since December 2015 could be requested. Donations made in the years prior to 2015 could not benefit from the refund. If we choose to do nothing and finally the courts confirm this approach, we will lose the right to request the refund. Therefore, it is important to move now and start requesting the rectification of the Personal Income Tax self-assessments.
By way of summary and in order to understand all the above about the taxation of donations in the IRPF, let’s give an example:
Let’s suppose that I donate an asset worth 100,000 Euros. My patrimony is going to be reduced by 100,000 Euros as a consequence of the donation. If, for example, that property had cost me 50,000 Euros at the time, I would have a tax gain of 50,000 Euros that I would have to include in my Personal Income Tax return. If, on the other hand, that property had cost me 150,000 Euros, I would have a tax loss of 50,000 Euros. The approach of the Tax Authorities is that I could only include the 50,000 Euros of tax gain but not the 50,000 Euros of tax loss. Well, according to the Resolution of the Regional Economic-Administrative Court of Valencia, it would have to take into account both the cases of tax gain and tax loss.
Both this tax gain and the tax loss can be included in the Personal Income Tax return. If you are in this situation and would like more information about taxation of donations in the Personal Income Tax, you can send an email to info@martinezlafuenteabogados.com or contact Martínez Lafuente Abogados through our website.