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If I’m buying a property, can I save on taxes by creating a company?

It is generally not worthwhile to form a company (sociedad limitada or “SL”) if it is your only house and the main purpose of buying the property is for your own use. If, however, you buy the house principally as an investment, then forming an SL may become cost-effective, paying off the cost of forming the SL and accounting for the SL. For more information about creation of an SL, please see our corporate website.

You should consider the question of whether to become a legal resident or not, and whether to create an SL or not, as part of your international tax plan, a plan that should be thought out if you live or work in more than one country.

Example:

Suppose Bob and Judy buy a house for 200.000€. They spend 12.000€ to furnish and renovate it. They earn 16.000€ per year renting it out during the summers. Management fees and utility costs on the property are 3000€ per year. After 3 years, they sell it for 300.000€ and buy another property. Bob and Judy file as nonresidents in Spain.

Case one: They do not form an SL.

On their yearly income tax form, they pay 25% of 16.000€, or 4000€. They can’t claim back the 12.000€ they spent. The property tax will be around 400€ per year. On selling the property, they pay 25% of the 100,000€ in capital gains.

Case two: They form an SL.

They must still file a yearly personal income tax, but they will have no income. The property tax remains at 400€ per year. Their yearly corporate tax will be 30% of the net profit after deducting all the expenses. Strong Abogados’ fee for forming an SL is 1500€, plus VAT for residents. The yearly fee for accounting is 3300€. Expenses can often be apportioned to subsequent years, so we can say all deductible expenses amounts to:

4000€ renovation/furnishings (12.000€ / 3 years)
3000€ management fees and utilities
3900€ SL costs: accounting/formation
400€ property tax
500€ general maintenance expenses on the house
———-
11.800€

So, the corporate tax is 30% of 4200€, or 1260€. On selling the property, Bob and Judy could pay 30% of 100,000€. They then buy their next house with these reserves. Property tax and VAT can be deducted or claimed back from the company. Comparing the two possibilities, we have:

 

CLASE 1
CLASE 2
Income tax (per year)
4000€
1260€
SL costs (per year)
0€
3900€
Capital gain
25000€
0€
Categoría: CONVEYANCING-plus