Exemption for reinvestment in the primary residence

The Central Economic-Administrative Court (TEAC) clarifies the regime applicable to the exemption for reinvestment in the primary residence

The exemption for reinvestment in a primary residence provided for in the Personal Income Tax Law is not a tax option, but rather a right of the taxpayer that can be exercised within two years of the sale of the primary residence, even if it is not declared in the voluntary self-assessment period of the financial year in which the capital gain is generated.

The issue resolved by the TEAC revolves around whether the exercise of the reinvestment exemption can be considered a ‘tax option’. If so, it could only be exercised by filing the self-assessment for the tax corresponding to the year in which the gain is generated, without the possibility of modifying it subsequently except within the voluntary declaration period.

However, the TEAC rejects this interpretation and concludes that the requirements for classifying the exemption as a tax option are not met. In particular, it recalls the case law of the Supreme Court: that a tax option requires that the rule grants the taxpayer the possibility of choosing between different and mutually exclusive legal regimes and that this choice is reflected in a voluntary act, such as the filing of a self-assessment.

In the case of the reinvestment exemption, the taxpayer does not choose between alternative tax regimes, but exercises a legally recognised right, provided that he meets the conditions laid down:

• that the capital gain derives from the transfer of his habitual residence,
• that he reinvests the total amount obtained in the acquisition of a new habitual residence,
• and that he does so within two years.

Neither the Personal Income Tax Law nor its regulations require that this right can only be exercised in the self-assessment corresponding to the financial year in which the property was transferred. Therefore, if the taxpayer did not apply the exemption in their initial return, they may request its recognition by means of a self-assessment correction within the general limitation period, provided that they meet the substantive requirement of reinvestment within the legal period of two years.

This interpretation guarantees greater protection of the taxpayer’s rights and recognises the substantive nature of the reinvestment exemption, separating it from formalities that are not provided for in the law and do not serve its purpose.

If you have any questions on this matter, please do not hesitate to contact us by telephone at Carles Monfort Codina or by email at cmc@btsasociados.com. We will be happy to assist you.