Rent to sell contract (tax issues)

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This topic contains 8 replies, has 3 voices, and was last updated by Profile photo of Anonymous Anonymous 7 years, 10 months ago.

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  • #54650
    Profile photo of Anonymous
    Anonymous
    Participant

    I’m in the process of selling a house but the buyers can’t get a mortgage, so we are agreeing to rent (or become the mortgage lender) it for X amount per month for 5 years with the X amount being taken from the price, they are also putting down a large lump sum at the beginning.

    1. The lump sum is refundable at all times
    2. The x amount per month is only 50% refundable if they don’t buy before or at the point of 5 years.
    3. The price is fixed for 5 years

    What tax issues will be liable, I don’t want to be paying income tax on the rental income and then tax on the same again when the sale goes through.

    Does anyone have tips, ideas, suggestions etc for this type of contract for tax purposes??

    Thanks Ian

  • #89445
    Profile photo of Anonymous
    Anonymous
    Participant

    ian ok. I have a feeling that your property is in Costa Esuri. This has become quite common there. This is such a new area that I don’t think there is any one who can answer all your questions with any form of conviction or confidence.

    ” I’m in the process of selling a house but the buyers can’t get a mortgage,”

    FACTUALLY, THAT MEANS YOU ARE NOT SELLING.

    so we are agreeing to rent

    FACTUALLY THIS IS WHAT IS HAPPENING

    (or become the mortgage lender)

    YOU ARE NOT LENDING THEM MONEY TO BUY, EITHER AS A FINANCIAL INSTITUTION OR A PRIVATE LENDER. I BELEIVE PRIVATE LENDING FOR COMMERCIAL TRANSATIONS IS ILLEGAL IN SPAIN. I HOWEVER STAND CORRECTED.

    it for X amount per month for 5 years with the X amount being taken from the price,

    DO YOU MEAN THAT X x 12 x5 =60 MOMTHS SAY €10000, RENT WILL BE TAKEN OFF THE ULITIMATE SELLING PRICE IN 5 YEARS TIME.

    they are also putting down a large lump sum at the beginning.

    WHAT DOES THIS MEAN ?, ARE YOU SAYING THAT IF THE PRICE IS €120,000, THEY WILL PAY RENT OF €10K AS ABOVE OVER 5 YEARS & THAN ANOTHER UP FRONT DEPOSIT OF SAY €40k, SO AT THE END OF THE FIVE YEARS THEY NEED TO PAY YOU €70k .

    AS PER ABOVE EXAMPLE I SEE THE FOLLOWING:

    a) Why should you fix a price now for what may happen in five years time. As property is a long term investment it stands to reason that it will be worth more in five years than today. It seams that the buyer has seen desparation & is expoliting it fully.

    b) What price for sale would you put on the contract five year hence. if Its lower than €120k, while the going rate for a similar property maybe say 200k, You will than have capital gains tax problem.

    c) What happens if the buyer who will be five year older cannot get a mortgage for eason of health or unemployment etc.

    d) Why would they give you lump sum & not ask for it. I would certainly ask for it, if I had the option for not only commercial reasons but for other reasons such as family, children’s wedding, uni fee, medical fee etc.

    e) What will you do with the lump sum. As it has to be ring fenced to be called at any time by them. Which means you will be paying tax on the paltry rate that you will get. In Spain & than on your tax return in UK.

    f) You will have to pay tax on the rent & you will not be allowed to offset your expenses. After five year the issue will arise that if you say it was not a capital gain & rental income than the question of tax on rental income will arise with penalty & intrest on tax.

    g) In Spain you are entitled to annual rent increase in line with the RPI. How are you going deal with it.

    f) What commission are you going to give to the Agent ? would it based upon introducing a tenant or a buyer. I beleive that in Spain the agent charge commission up front and this instance rental commission for five years. If the tenant leaves before how are you going to recoup the commission that you have paid from the agent.

    1. The lump sum is refundable at all times

    see above

    2. The x amount per month is only 50% refundable if they don’t buy before or at the point of 5 years.

    If, they don’t want to buy that means that they are calling all the shots

    3. The price is fixed for 5 years

    See above

    What tax issues will be liable, I don’t want to be paying income tax on the rental income and then tax on the same again when the sale goes through.

    See above

    Does anyone have tips, ideas, suggestions etc for this type of contract for tax purposes??

    I will personally not get involved if I was the property owner in the said scenario that you have mentioned. Also do not forget that Spanish rental law are heavily in favour of the tenant. Any slightest blemish on your part you could lose all your protection & than if you need to go to the court than God help you.

    In short you are giving your property to some at today’s price, they use it abuse, can demand the lump sum at any time, not buy and will ask for half the rent. What is in it for you ???

    Thanks Ian

  • #89245
    Profile photo of Anonymous
    Anonymous
    Participant

    ian ok. I have a feeling that your property is in Costa Esuri. This has become quite common there. This is such a new area that I don’t think there is any one who can answer all your questions with any form of conviction or confidence.

    ” I’m in the process of selling a house but the buyers can’t get a mortgage,”

    FACTUALLY, THAT MEANS YOU ARE NOT SELLING.

    so we are agreeing to rent

    FACTUALLY THIS IS WHAT IS HAPPENING

    (or become the mortgage lender)

    YOU ARE NOT LENDING THEM MONEY TO BUY, EITHER AS A FINANCIAL INSTITUTION OR A PRIVATE LENDER. I BELEIVE PRIVATE LENDING FOR COMMERCIAL TRANSATIONS IS ILLEGAL IN SPAIN. I HOWEVER STAND CORRECTED.

    it for X amount per month for 5 years with the X amount being taken from the price,

    DO YOU MEAN THAT X x 12 x5 =60 MOMTHS SAY €10000, RENT WILL BE TAKEN OFF THE ULITIMATE SELLING PRICE IN 5 YEARS TIME.

    they are also putting down a large lump sum at the beginning.

    WHAT DOES THIS MEAN ?, ARE YOU SAYING THAT IF THE PRICE IS €120,000, THEY WILL PAY RENT OF €10K AS ABOVE OVER 5 YEARS & THAN ANOTHER UP FRONT DEPOSIT OF SAY €40k, SO AT THE END OF THE FIVE YEARS THEY NEED TO PAY YOU €70k .

    AS PER ABOVE EXAMPLE I SEE THE FOLLOWING:

    a) Why should you fix a price now for what may happen in five years time. As property is a long term investment it stands to reason that it will be worth more in five years than today. It seams that the buyer has seen desparation & is expoliting it fully.

    b) What price for sale would you put on the contract five year hence. if Its lower than €120k, while the going rate for a similar property maybe say 200k, You will than have capital gains tax problem.

    c) What happens if the buyer who will be five year older cannot get a mortgage for eason of health or unemployment etc.

    d) Why would they give you lump sum & not ask for it. I would certainly ask for it, if I had the option for not only commercial reasons but for other reasons such as family, children’s wedding, uni fee, medical fee etc.

    e) What will you do with the lump sum. As it has to be ring fenced to be called at any time by them. Which means you will be paying tax on the paltry rate that you will get. In Spain & than on your tax return in UK.

    f) You will have to pay tax on the rent & you will not be allowed to offset your expenses. After five year the issue will arise that if you say it was not a capital gain & rental income than the question of tax on rental income will arise with penalty & intrest on tax.

    g) In Spain you are entitled to annual rent increase in line with the RPI. How are you going deal with it.

    f) What commission are you going to give to the Agent ? would it based upon introducing a tenant or a buyer. I beleive that in Spain the agent charge commission up front and this instance rental commission for five years. If the tenant leaves before how are you going to recoup the commission that you have paid from the agent.

    1. The lump sum is refundable at all times

    see above

    2. The x amount per month is only 50% refundable if they don’t buy before or at the point of 5 years.

    If, they don’t want to buy that means that they are calling all the shots

    3. The price is fixed for 5 years

    See above

    What tax issues will be liable, I don’t want to be paying income tax on the rental income and then tax on the same again when the sale goes through.

    See above

    Does anyone have tips, ideas, suggestions etc for this type of contract for tax purposes??

    I will personally not get involved if I was the property owner in the said scenario that you have mentioned. Also do not forget that Spanish rental law are heavily in favour of the tenant. Any slightest blemish on your part you could lose all your protection & than if you need to go to the court than God help you.

    In short you are giving your property to some at today’s price, they use it abuse, can demand the lump sum at any time, not buy and will ask for half the rent. What is in it for you ???

    Thanks Ian

  • #89449
    Profile photo of Anonymous
    Anonymous
    Participant

    The “opción de compra” or option to buy is preferable (for the potential buyer) to be formalized in “Escritura”.

    In that case, there is a tax (in private contracts is the same, but it is obviously more difficult for “Hacienda” to notice that), calculated as 7% over at least the 5% of the real price of the property.

  • #89249
    Profile photo of Anonymous
    Anonymous
    Participant

    The “opción de compra” or option to buy is preferable (for the potential buyer) to be formalized in “Escritura”.

    In that case, there is a tax (in private contracts is the same, but it is obviously more difficult for “Hacienda” to notice that), calculated as 7% over at least the 5% of the real price of the property.

  • #89459
    Profile photo of Anonymous
    Anonymous
    Participant

    Hi Shakeel, thanks for your reply, it’s always good to get another perspective on things.

    I’ll go into more details so it’s clear.

    1. The lump sum (30,000) is refundable at all times
    2. The 1000 amount per month is only 50% refundable if they don’t buy before or at the point of 5 years – 100% of what they pay is taken off the asking price.
    3. The price is fixed for 5 years at 150k (Which is a good price and also I can’t really see anything happening in the future with upward prices, yes we could be wrong, but hindsight isn’t available and in 5 years people may be saying what a fantastic decission or that was crap, we are willing to risk it)

    4. The rent for the property in El Bosque (Cadiz Prov) would be 300 or less per month, so if they don’t buy we are getting 500.
    5. No agents involved.

    Ian

  • #89259
    Profile photo of Anonymous
    Anonymous
    Participant

    Hi Shakeel, thanks for your reply, it’s always good to get another perspective on things.

    I’ll go into more details so it’s clear.

    1. The lump sum (30,000) is refundable at all times
    2. The 1000 amount per month is only 50% refundable if they don’t buy before or at the point of 5 years – 100% of what they pay is taken off the asking price.
    3. The price is fixed for 5 years at 150k (Which is a good price and also I can’t really see anything happening in the future with upward prices, yes we could be wrong, but hindsight isn’t available and in 5 years people may be saying what a fantastic decission or that was crap, we are willing to risk it)

    4. The rent for the property in El Bosque (Cadiz Prov) would be 300 or less per month, so if they don’t buy we are getting 500.
    5. No agents involved.

    Ian

  • #89462
    Profile photo of Anonymous
    Anonymous
    Participant

    Thank you for providing further information. You have a legal answer by a lawyer.

    I had posted my views as I saw it. Yes hindsight is wonderful. Its your call at the end of the day in your circumstances.

    All I can say that things don’t work out if they are complex/complicated whether is personal or financial. It makes it more difficult when money is involved, Further in a Country where the legal system is slow, unprotected and biased towards tenants it is that much more important to keep it plane & simple.

    Good luck in what ever you do.

  • #89262
    Profile photo of Anonymous
    Anonymous
    Participant

    Thank you for providing further information. You have a legal answer by a lawyer.

    I had posted my views as I saw it. Yes hindsight is wonderful. Its your call at the end of the day in your circumstances.

    All I can say that things don’t work out if they are complex/complicated whether is personal or financial. It makes it more difficult when money is involved, Further in a Country where the legal system is slow, unprotected and biased towards tenants it is that much more important to keep it plane & simple.

    Good luck in what ever you do.

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