Have I inherited a house: do I have to include it in my tax return?

Yes, but it is not subject to tax (you won’t have to pay) unless you sell or rent it out and therefore make a profit. This is a common question from heirs when the tax return season begins. At G. Elías y Muñoz Abogados we are experts in inheritance matters and specialise in providing advice for these types of cases. Let’s look at the main questions that arise in these situations and provide clear answers.

Do I have to include the inherited flat in my tax return?

Yes, you must include any property in your tax return, whether you inherit it or receive it in any other way. It is a common misconception to think that once you have paid Inheritance Tax and the local capital gains tax, you no longer have to include the property in your tax return; however, you do have to include it, though this does not mean you have to pay tax on it.

There are several possible scenarios:

• The property is vacant because you neither use it nor rent it out. In this case, the tax authorities consider that property income is generated and you will have to declare a percentage of the property’s cadastral value as income.
• You rent out the house. Any rental income you receive is considered property income and must be included in your tax return, but you can also deduct expenses (for example, any maintenance costs you have paid).
• You sell the property. You must declare the capital gain or loss arising from the sale.

What happens if several people have inherited the house?

For example, three heirs may have inherited a flat, with one holding a 50% share and the other two 25% each. In this case, each heir must include their share of the property in their tax return.

Do I have to pay income tax on the inherited property?

You will have to declare any capital gain or loss; in other words, if you sell the inherited property or rent it out and make or lose money, you must declare this in your tax return.

If, for example, you inherit a flat worth €200,000 and sell it in the same tax year for €250,000, a capital gain arises from the difference between the purchase price and the sale price. If you sell it for less, a capital loss is incurred. You must include this gain or loss in your tax return.

Another example: if you inherit a flat and rent it out, you will receive rental income and incur expenses. You must also include this in your income tax return.

How do I declare an inherited property if I am a usufructuary?

If you have been granted the usufruct of a let property, you must include this in your tax return. Ownership of a property (a flat, for example) is divided into two parts: the usufruct, which entitles the holder to receive the benefits, such as the rental income from the flat; and the bare ownership, which does not generate income because the bare owner does not receive any benefits or rental income.

If the usufructuary receives rental income, they must include that income in their income tax return.

How is the capital gain on an inherited property calculated?

It is calculated by subtracting the acquisition value (the value assigned to the property in the inheritance for Inheritance Tax purposes) from the disposal value (the money you receive from the sale of the house). If the result is positive, it is subject to income tax.

We must bear one thing in mind: the acquisition value in an inheritance is the market value of the property at the time of death, not the price the deceased paid when they bought the house.

Can personal income tax exemptions be applied to an inherited property?

Yes, there are three types of exemptions that can be applied in your tax return for an inherited property:

• The exemption for the sale of a property inherited from a person aged 65 or over. To claim this exemption, two conditions must be met: the property must be the owner’s main residence and the owner must be aged 65 or over.
• The exemption for reinvestment in a main residence. In this case, the requirements are: that the property was the main residence, that the proceeds are reinvested, in full or in part, in the main residence, and that the reinvestment takes place within the timeframe set out in the regulations.
• The exemption for the sale of an inherited flat where no capital gain is realised. In this case, the sale of the inherited property does not generate a profit because it is sold for less than the price at which it was inherited, so no income tax will be payable. This may also occur when the costs associated with the property reduce the gain to the point where it becomes a capital loss.

How do I file my tax return if I have inherited a property?

You can follow these steps:

• Gather information. You will need to obtain:
  o The deed of inheritance to check the declared value of the property for Inheritance Tax purposes.
  o Receipts for the expenses you paid in connection with the inheritance (notary, land registry, solicitors, etc.).
• Calculate the capital gain and check whether any of the exemptions we have discussed apply.
• Include the property in the relevant section of your tax return.

For all of this, it is advisable to seek the assistance of lawyers specialising in inheritance and inheritance tax, so that they can analyse your case and verify whether you have included all deductible expenses, whether the value of the property included in your tax return is correct, and whether the relevant exemptions have been applied.

Contact our team of lawyers specialising in inheritance in Madrid to resolve any issues regarding the taxation of inherited properties and to assist you with all the necessary procedures.