The autonomous region of Madrid has announced tax cuts for 2014, including a reduction in the transfer tax that buyers pay when purchasing a resale property.
High transactions costs are killing the Spanish real estate market at a time when it needs all the help it can get. So it comes as a great relief to see at least one region start to reduce taxes on home sales.
The president of the Autonomous Region of Madrid, Ignacio González, has announced plans to reduce the ITP transfer tax on resale properties in the Madrid region to 6pc in 2014, down from 7pc today. He also announced that stamp duty (AJD) on notarised documents used in house sales will go down from 1pc to 0.75pc, plus a reduction in the marginal rate of income tax.
“The money is better in the pockets of our citizens,” said González.
As a result, the transfer tax of 6pc on resale properties in Madrid will be the lowest in Spain. The autonomous regions of Valencia and Catalonia recently raised ITP to 10pc, whilst in the Balearics and Andalusia, ITP is on a sliding scale from 7pc to 10pc.
However, VAT on new homes in Madrid will remain at 10pc. VAT is set by the national Government in Madrid, not regional Governments.
By reducing ITP to 6pc, Madrid will start attracting more interest from international investors, at the expense of other regions. The net effect will be to increase sales and tax revenues in Madrid, and help stimulate the local economy. It’s a smart move for Madrid.
The only problem with announcements like this is they encourage people to delay purchasing until the reduced tax comes into force. Expect resales in Madrid to start falling in the last quarter of this year, and then rise rapidly in the new year.
Personally, I am vehemently against high taxes on property buyers. High taxes are terrible for ordinary families, who lose a big chunk of their savings on taxes, and end up with inferior quality housing. If you take awy 15pc of a family’s property budget in taxes, costs have to be cut somehow to compensate. Costs will be cut in construction quality, fixtures, fittings, and furnishings.
Just to give you an international benchmark, in hight-tax Denmark, there is no transfer tax, and no VAT on new homes. The Danish authorities may tax profits and capital gains heavily, but they don’t decapitalise ordinary families just because they need to buy a new home.
In Extremadura, one of the poorest regions in Spain, with a housing stock to match, the ITP is 11pc, almost guaranteeing that there will never be any investment in upgrading the housing stock of the region.