BBVA Research has warned that changes in property taxes introduced by the government in the latest tax reform may drive down house prices in the short term, and argue it would have been more advisable to increase tax revenue via property rates (known as IBI in Spain).
In its latest bout of tinkering with the tax code, the Spanish Government has eliminated the inflation-relief coefficient on property sales, whilst the abatement coefficient that reduced capital gains on properties acquired before 1994 now only applies to the first €400,000.
BBVA Research point out that some tax breaks still remain in place, namely when a vendor sells a primary residence and uses the proceeds to buy another main home, or if the vendor is over 65 or disabled.
According to BBVA Research, these changes will affect Spanish property prices because owners will be trying to sell before the reform comes into force at the end of the year, which could lead to a sharp drop in prices in the closing days of 2014.
Once the new laws come into force, owners could directly add the increase in taxes to the price, as was the case with the tax deduction for purchases.
BBVA Research also warn of the impact of the supply of property for sale, since the tax measures could dissuade owners from selling and lead to an increase in empty properties or in the stock of rental properties.
As the same time, it could lead to owners declaring a lower value to reduce their capital gains. In Spain, high tax rates tend to lead to tax evasion and undeclared cash payments.
Though largely critical of the latest tax changes, BBVA Research did welcome the elimination of tax breaks for rental tenants as these distorted the market through higher rental prices. It also welcomed the reduction in tax exemption for landlords, although it argues a full elimination would have been better.