Tax Deduction for Reinvestment in Primary Residence Extended to Four Years
The Central Economic-Administrative Court (TEAC) has issued a significant ruling during the income tax campaign, favoring taxpayers who sold their primary residence in recent years but did not apply for the reinvestment exemption in their income tax return (IRPF). This decision clarifies that taxpayers have a right to claim this tax relief even after filing their initial tax declarations, by requesting a rectification.
Previously, the Spanish Tax Agency maintained that if a taxpayer failed to explicitly state their intention to utilize the reinvestment benefit in their initial declaration, they forfeited the right to do so later. The agency viewed this exemption as a tax option that could only be exercised within the designated filing period.
However, the TEAC has corrected this interpretation, emphasizing that the reinvestment exemption should be regarded as a right, not merely an option tied to a strict timeline. Taxpayers can now seek this exemption within the general four-year period allowed for tax rectification, provided they meet the established requirements.
According to the law, to qualify for this tax reduction, a taxpayer must reinvest the capital gains from the sale of their primary home--defined as the difference between the purchase price and the selling price--into another property that serves as their primary residence within a two-year period. While this material condition remains unchanged, the new ruling allows for rectification requests to be made up to four years post-filing, even if the taxpayer did not indicate their intention to reinvest in their initial declaration.
Before 2013, the IRPF included a well-known deduction for investment in primary residences, which permitted taxpayers to deduct a portion of the amounts paid for the purchase of their main home. This deduction was eliminated for new purchases following the financial crisis and the real estate bubble burst. Nonetheless, the exemption for reinvesting capital gains from the sale of a primary residence was retained, as long as the proceeds were used for acquiring another property within the specified two-year timeframe.
The complications arose when a taxpayer, despite meeting the reinvestment criteria, failed to mention it in their IRPF declaration, either due to oversight or uncertainty about purchasing another home. In such cases, the Tax Agency typically denied the tax benefit, arguing that the opportunity to claim it had lapsed.
The TEAC's analysis centered on a case involving a taxpayer who sold their home in 2018, reported the capital gains in their 2019 IRPF declaration, and later, in 2021, sought to amend the declaration after reinvesting within the two-year period. The Tax Agency rejected the request, citing the elapsed time to exercise that option. However, the TEAC's ruling has shifted this viewpoint, confirming that the exemption is a right that can be claimed within the four-year rectification window, assuming the two-year reinvestment condition was satisfied.
In its ruling, the TEAC drew from recent Supreme Court pronouncements that delineated the differences between tax options and rights. This distinction is crucial; options are decisions that taxpayers can make within a legally defined timeframe, while rights are recognized entitlements that can be exercised at any time, provided the legal conditions are met. Therefore, in the case of the reinvestment exemption for primary residences, since it is classified as a right rather than an option, taxpayers are entitled to claim it even after submitting their initial self-assessment declaration, through a rectification request made within the general four-year limitation period.
