Assuming that you have selected your dream home or ideal real estate investment, you now have to go through the various steps of actually purchasing the property. It is of paramount importance that you not only understand the purchasing process, but that you adhere to it in its entirety. We hope this guide helps you make a well-informed decision because we know that for the majority it is a once in a lifetime process.
Hire a Lawyer
It should be re-iterated that you need to hire a lawyer – and preferably not the lawyer that is recommended by the estate agent. If a lawyer is receiving many of their clients through referrals from an estate agent, then it will be in the lawyer’s interest to keep the agent happy, which may no be in the best interests of the client.
Buying the Property
The first thing before you part with a penny is to make sure that the person selling the property is entitled to do so. When buying through an estate agent, they will normally do this basic search for you but it is advisable to double check. Your agent or lawyer will make the search in the local land registry. The title deeds should be checked not only so they correspond with the seller’s details but that there are no mortgages or charges of any sort against the property. A second search should check for any outstanding bills (electricity, water, local rates) and more importantly any outstanding community charge. Briefly if the property is located on a complex where there are communal facilities (swimming pool, gardens, reception etc.) there will be a monthly community charge payable by each owner. It is therefore important to check that this has also been paid up to date.
If everything is to you and your lawyer’s satisfaction you can then proceed to next stage, the signing of the private contract of purchase.
The Private Contract
Here in Lanzarote (Spain) nearly all property purchase is regulated firstly by a private contract. Article 1278 of the Civil Code (Codigo Civil) states that private contracts in whatever form (always have a written agreement) can be valid legally as long as both parties agree to terms (agree to be contractually bound). As in accordance with contract law the terms like the price, details of property being purchased, method of payment, terms of payment, the deposit should be explicit in the document. The private contract becomes legal in its entirety as soon as the purchase deposit is paid (normally 10% of the actual sales price). This is extremely important because from this point on both parties are legally bound and have access to their full legal rights as contained in the Civil Code. In the majority of cases the purchaser will be buying the property through a recognized estate agent (having the initials API or GIPE) who will draw up the private contract but we would always recommend that you use independent legal advice at all stages. If you are buying privately (without the use of an estate agent) always have legal representation. If both parties are happy with all the terms contained in the private contract, the deposit can then exchange hands and the contract signed by both. If after this stage the seller reneges on the sale, he/she is legally obliged to return not only the deposit but also the same amount again to the buyer (double the initial deposit). On the other hand if the buyer fails to proceed he/she will forfeit their deposit. For this reason it is extremely important that you are absolutely sure of your decision.
The Deeds (Escritura) and Paying the Purchase Price
You are now happy with your choice of property and you can conclude, without doubt, that everything is in order, you can now pay the balance (90%) and start the official transfer of the property to your name. This stage is quite systematic, being governed by Spanish law. The Deeds (Escritura de Compra Venta ), which is the official document , will be signed in front of the Spanish Notary thus transferring ownership from seller to buyer. This will normally take place four to six weeks after the initial signing of the private contract (may differ depending on time frame agreed within that contract). On the signing of these new title deeds your cheque(s) for payment will be shown to the notary and included as part of the documentation of the deeds. If you are not resident in Spain, by this stage you will have opened a non-resident bank account and transferred the required money from your Irish or UK bank to this new account. The cheque can contain all the necessary information regarding the property, seller etc. and will be bank guaranteed (Cheque Bancaria). In the case where the seller is not a Spanish resident nothing has to be brought in over the bank officially (no conformed cheques or non resident accounts are required). Both parties just have to declare in front of the notary that they are both non-resident and that the purchase price has been paid in a foreign country in foreign money. This declaration will be documented in the deeds. It is important to note that non-residents making a profit on the sale of a property are obliged to pay Capital Gains Tax (the rate is 18% of the net capital gain). This is a two phase process.
Firstly, the purchaser withholds 3% of the purchase price (escritura price), which is payable to the Spanish Tax Authorities (La Hacienda) within one month.
Secondly, the non-Resident vendor is required to make a capital gains tax declaration within four months of signing the deeds. If the actual amount of Capital Gains Tax due (18% of the net capital gain) differs from the initial 3% payment, then the seller is either entitled to a refund or is required to pay the difference.
The payment of the 3% retention is simple enough (form 211), however the actual computation of the real amount of Capital Gains Tax is more complicated and requires proper fiscal advice.
Due to the many Bilateral Taxation treaties that Spain has with other countries, including Ireland and the UK, it is important that this declaration is done correctly. Non-resident vendors who have owned a property prior to 1986 will not be liable for capital gains tax. Having signed the deeds in front of the notary they (the title deeds) will now have to be registered in the property registry.
Registering the Purchase
Signing the deeds (escritura) in the Notary does not yet mean that you officially own the property: for the transaction to be complete you must register the deeds in the property registry (registro de la Propiedad). A 6.6% purchase tax (Transmission Tax), or 8% (IGIC at 5% plus Stamp duty at 1%) in the case of a new property, on the new declared price has to be paid before the property can be registered. The property should be registered within 30 working days or the buyer will receive a fine. At this moment the buyer gets a simple copy of the deeds (copia simple) until the original deeds can be taken out of the land registry (approximately 20-30 days later). By this stage the purchase and transmission of property from seller to buyer has been completed.
If the buyer can’t make it to the signing of the deeds a power of attorney can be given to somebody else who can sign on their behalf. But this is not to be advised. It is still strongly advisable to use independent legal advice. A tax known as Plus Valia, which is based on the increase in the land value of the property from the previous sale to this sale, will have to be paid to the local authorities within a certain period after the purchase. This is very important because it is a tax bill which you may receive months after the purchase and therefore may not have been mentioned during the purchasing process. As a non-resident you will be given a fiscal number (tax purposes) known as a NIE as this will be your identification number for any tax bills. As a non-resident you will have to pay an income tax on the property whether it is rented or not. This can be explained to you by any fiscal advisor (Gestoria as they are called in Spain). Finally, as a general rule allow yourself an additional 11% of the purchase to cover ALL costs associated with buying a property in Lanzarote (Spain). This 11% should be well sufficient to cover the stamp duty, registry fee, notary fees, Plus valia, and any additional costs.
The purchasing process from start to finish will normally take about two months.
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