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Other Property Tax Questions - FAQ

​Transfers Taxable under Article 5 of the Income Tax Act

1. If I choose to be taxed under Article 5 (tax on the capital gain) how am I going to be taxed?

If you choose to be taxed under Article 5 you will pay provisional tax on the deed at 7%. An election can only be made in the circumstances mentioned in Article 5A (3) of the Income Tax Act. (Refer to FAQ 8 – New Property Tax System)

Then you would have to declare the gain in your income tax return. To calculate the taxable gain you have to see if the transfer is taxable on business profits or capital gains.

Business

If the gain is taxable as a business profit, it is taxed in terms of article 4 and you have to declare it in the same manner as all other business profits. You will be allowed to deduct the cost of acquisition and other expenses made in the production of the income. The net profit has to be declared in box 2 of your tax return. A profit and loss account is to be attached.

The Tax on Property Transfers Rules S.L 123.92, establish what records should be kept in respect of your property trading activity, apart from the other business records; how to establish the cost of acquisition and the transfer value in certain cases; and how to allocate expenses in case of a project.

Capital gain

If the transfer is taxable as a capital gain, it is taxed in terms of article 5. You will be allowed a deduction for the cost of acquisition and the other deductions mentioned by article 5 and the relative Capital Gains Rules S.L 123.27. Special rules regarding what records are to be kept apply in this case too.

If the tax on the capital gain or on business profits, as the case may be, is less than the tax that you would have already paid as provisional tax, you will be refunded the excess tax paid. If it results to be more, you will have to pay the balance.

2. What deductions can I claim to calculate the capital gain under Article 5?

To calculate the capital gain under Article 5 you can claim the following deductions:

 

  • The price at which the property was acquired;
  • The inflation element;
  • Any ground-rent paid on the property and for which a deduction has not been already claimed in any other way;
  • A maintenance allowance at the rate of 0.4% for every year that you owned the property;
  • Improvements carried out;
  • Any duty paid on acquisition;
  • Notary's fees;
  • Brokerage fees;
  • Other expenses directly related to the transfer but not exceeding 5% of the selling price.

 

3. Can you give an example?

Example: A property was purchased in 2003 for €60,000. €10,000 improvements were carried out in the same year. €3,000 was paid as duty, and notarial fees amounted to €500. The property is sold in 2006 for €150,000. The transferor has elected to be taxed under Article 5. The election can only be made in the circumstances mentioned in Article 5A (3) of the Income Tax Act. The capital gain is calculated as follows:

Selling Price      150,000

 

Deduct the cost of acquisition and other allowable deductions

Cost of the property per deed of purchase 60,000

Improvements carried out in 2003 10,000

Legal and notarial fees 500

Duty on documents paid on acquisition €​3,000

Inflation (calculated as follows)

Cost of acquisition x indexyd - indexyaindexya

yd = index for the year immediately preceding that in which the transfer is made;

ya = index for the year immediately preceding that in which the property had been acquired;     

In this case we apply the index for years 2002 (638.54) and 2005 (684.88), i.e.:

70,000 x 684.88 - 638.54 638.54

= € 5,080

Maintenance allowance 

(0.4% of the cost price for every year) i.e. 70,000 x 0.004 x 3 = €840

Total cost of acquisition and other allowable deductions €79,420

Capital gain to be declared in the tax return €70,580

The €70,580 gain is added to your other income for the year and the total is taxed at the normal rates which are applicable to you. If your other income has already reached the 35% tax bracket, all the capital gain amounting to €70,580 is taxed at 35% and the tax would therefore be equal to €24,704.

The notary would have already withheld 7% of €150,000 as provisional tax, i.e. €10,500. You will therefore have to pay the remaining balance equal to €24,704 - €10,500 = €14,204. This amount must be paid when you file your tax return.

Partition of Property

1. My brother and I have inherited two properties. We are now going to take one each. Is there any tax involved?

Where no compensation (owelty) is due, the partition is not taxable. It will be considered that no compensation has been made if the value of the shares is equal to the value of the assets assigned to each co-partitioner. In this case, if you and your brother inherited half share each, and the two properties have the same value, no tax is to be paid.

2. My brothers and I have inherited two properties, a sum of money and some gold items. Two of us are going to take one property each; the other will take the money and the gold items. There is not going to be any compensation because the three shares are of equal value. Are we going to be charged tax?

No tax is due in this case either. The money and the gold items are not considered to be compensation because they are part of the inheritance itself. Tax would have been due if compensation was due to any of you.

3. My brother and I inherited a house from our father. The house will be taken by my brother and he will compensate me by paying me a sum of money. Am I going to be charged tax?

Let us say that the value of the property at the time of inheritance was €40,000. Therefore each one of you inherited €20,000. Today the value of the property is €60,000, so your share is €30,000 each. Therefore the compensation due to you is €30,000 which is not going to be paid out of the common property or other assets.

It is considered that in the partition you have transferred half of the house to your brother. If the house was inherited after 24 November 1992, you have to pay tax on the transfer value of half of the house less the value of half of the inheritance, i.e. 12% on (€30,000 - €20,000) = €1,200.

When any compensation is involved it is recommended that you seek professional advice because very often the relevant calculations are quite complicated. For more details about the tax on transfers involving an owelty, see the Tax on Property Transfers Rules S.L 123.92.

More on the Final Tax System (Article 5A – Tax on Property Transfers)

1. I bought a property about 15 years ago and its market value today is €100,000. I am going to exchange it with another person's property which he had inherited in 1999 when its value was €30,000. Today it is worth €96,000. How are we going to be taxed?

When property is transferred through an exchange, the parties are considered to have made two separate transfers.

The property that was purchased 15 years ago is taxed at 10% on €100,000 = €10,000.

The other person who had inherited the property at €30,000 is transferring the property at €96,000. He must therefore pay 12% on (€96,000 - €30,000) = €7,920.

Had the property been inherited before 25 November 1992 the tax would have been 7% on €96,000 = €6,720.

2. I am going to enter into a contract of emphyteusis. How am I taxed on the ground rent paid to me?

When you assign property by emphyteusis or sub-emphyteusis, the ground rent that you receive is taxed as income in accordance with the provisions of article 4 and must be declared in your tax return as income derived from property. Tax will be payable for every year during which you receive the ground rent.

However, if besides the ground rent you also receive a premium, you have to pay final withholding tax on the premium less any allowable deductions.

3. How are redemptions of ground rent taxed?

A redemption of ground rent is taxed at final withholding tax. However, when ground rent is redeemed by means of a schedule of redemption, the Registrar of Courts shall deduct from the deposit 10% of the sum payable for the redemption. The 10% is provisional.

As in other cases, if you had inherited the property that you are assigning by emphyteusis, or in respect of which you were receiving ground rent which has been redeemed, and you had inherited the property after 24 November 1992, the taxable amount is reduced by the acquisition value.

The same applies if you had acquired the property through a donation made more than 5 years before you assigned it by emphyteusis, as the case may be.

However, in such cases, the acquisition value is not wholly allowed as a deduction, because you would not be transferring the whole property.

The Tax on Property Transfers Rules S.L 123.92, give more details regarding the calculation of the acquisition value in such cases.

Some Transfers that are Exempt from Tax

(FAQ 9 under the ‘New Property Tax System’ lists all the exemptions prescribed under Article 5A of the Income Tax Act)

1.  I have been living in a property for more than three years with a permit issued by the Housing Authority pursuant to a promise of sale (konvenju) by that Authority, but the contract has been made only this year. I now intend to sell the property. Is this transfer going to be taxable?

No, because the period during which you occupied the property as your own residence with the permission of the Housing Authority is considered to have been a period during which you owned that property. This transfer would be exempt from tax as long as you have occupied the property for a period of at least three consecutive years immediately preceding the date of the transfer.

2. I used to live with my mother for the past 10 years. The property had been my mother’s property. I have now inherited it and have kept on residing in it. I now intend to sell it, but I have not yet owned it for three years. Am I going to forfeit the exemption?

No, such a transfer would still be exempt.

If you are going to transfer property that you have occupied for at least three consecutive years, and you have inherited it from a direct ascendant (parents or grandparents), the period during which your mother had owned and occupied the property as her own residence is considered to be a period during which the property was owned by you. In this case it is important that you had occupied the property for at least three consecutive years immediately preceding the transfer.

3. I am going to transfer property that I had acquired under an assignment of property following a judicial separation from my husband. This property is my own residence but less than 3 years have elapsed since I became the owner of the whole property. Do I have to pay tax if I transfer it?

The period during which your husband owned the property and used it as his own residence is considered to be a period during which the property was owned by you. In this case you will not have to pay any tax as long as you occupied the property for at least three consecutive years immediately preceding the transfer.

4. Does this apply also where the separation was consensual?

Yes, in this case the transfer would also be exempt from tax.

5. My husband and I owned property in common between us. The property is now going to be assigned to my husband. Shall I be deemed to have made a taxable transfer?

No, you will not be charged any tax on this assignment.

6. My husband and I owned property in common. When my husband died, my children inherited his share and we are now going to partition the property amongst ourselves. Part of the property will be assigned to me, while the other part to my children. Are we going to have to pay any tax?

No. The assignment of property owned in common by you and your children, as heirs of your husband, is not taxable.

7. When a company transfers property to another company within the same group, is it charged any tax on the transfer?

The transfer of property from one company to another within the same group is exempt from tax. The conditions for a company to be considered as part of a group are found in article 5(9) of the Income Tax Act.​