Spanish study finds that taxes add more than 60% to original price of homes

Spain places a heavy tax burden on home ownership, according to a report Fedea published on Friday. Its economic analysis of housing taxation in Spain found that taxes account for 62% of a property's original purchase price over the course of its lifetime (from the day someone buys it until they eventually sell it).

On average, a homeowner pays around 55,000 euros in taxes when selling a property they originally bought for 90,000 euros and which now has an average market value of 240,000 euros.

More than half of the original purchase price goes towards taxes, including property transfer tax (ITP) on second-hand homes or IVA on new-build properties, council tax (IBI), personal income tax (IRPF) and the municipal 'plusvalía' (IIVTNU).

According to figures from the organisation for economic co-operation and development (OECD), this makes Spain the fourth-highest country in the EU in terms of the share that property taxes contribute to overall tax revenue, at 6.9%.

Fedea says that these figures highlight the need for tax reform that would create a more effective housing tax system and increase the supply of homes, helping to ease market pressures that have pushed house prices to record highs.

Since 2021, Spain has faced an annual shortfall of around 95,000 homes, with almost half of that deficit concentrated in Madrid, Barcelona, Valencia, Alicante and Murcia.

At the same time, the country has added around 200,000 new households each year, meaning some areas would need to build three times as many homes as they currently do to meet demand.

Jaume Menéndez, the report's author and a doctor of economics, calls for a three-pronged reform covering property development, ownership and transfers.

He proposes cutting IVA on the purchase of a first home from the current 10% to between 4% and 5%, while scrapping age restrictions that limit this support to buyers under 40 in many parts of Spain.

He also advocates a zero IVA rate for the construction of rental housing so developers would not have to pass bureaucratic costs on to tenants or buyers. He says the same tax treatment should apply to energy-efficiency renovation work.

To tackle the "cascading effect" of property transfer tax (one of the property sector's biggest complaints) Fedea proposes allowing buyers to deduct tax already paid during previous transactions.

Menéndez says that, with an 8% property transfer tax, a second-hand home effectively becomes 16% more expensive by the time it changes hands for a second time because the tax compounds with each sale.

Fedea also proposes replacing the current inheritance tax system with a single progressive rate of between 5% and 15%, alongside a tax-free allowance. It also recommends abolishing rules that link tax relief to family relationships.

In the Madrid region, for example, direct relatives currently receive a 99% reduction in inheritance tax when they inherit a home.

"Households are very different from what they were 50 years ago. Why should a son receive more favourable tax treatment than a nephew or a brother, when someone may die without children and leave everything to a nephew? What justifies taxing family, friendship or neighbourly relationships more heavily?" Menéndez asks.

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