Spain: Overview
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Spanish apartments: better empty than rented out
Spain’s house price boom has continued in 2006 with average prices for houses and apartments increasing by 9.1% (6.3% in real terms). Average house prices in Spain have increased by 174% from 1998 to 2006.
However, Spanish property is not attractive for buy-to-let investment. A flat-tax of 24% on gross rental income is combined with very restrictive tenancy conditions and very low gross rental yields.
Landlords are often better off keeping the unit unoccupied because the rental income is typically insufficient to compensate for the wear and tear of letting. About 14% of the total housing stock was vacant, bigger than the entire rental stock.
Transaction costs on second-hand properties are moderate and there are no restrictions on foreigners buying property in Spain.
RENTAL YIELDS
Yields are low in Spain
Returns from rentals are low, Global Property Guide research shows. Rental yields for luxurious condos in the centre of Madrid range between 2.9% and 4.2%. Properties in Barcelona have lower yields at around 2.6% to 3.75%.
According to Bank of Spain figures, show that gross returns from renting for Spain as a whole fell from 3.8% in Q1-1998 to 2.07% in Q4- 2006.
TAXES AND COSTS
Taxes are high in Spain
Effective Tax Rate on Rental Income |
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| Monthly Income | €1,500 | €6,000 | €12,000 |
| Tax Rate | 24% | 24% | 24% |
| Click here to see a worked example | |||
Source:
Disclaimer |
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Rental Income: All property owners are subject to a flat tax of 24% on gross rental income.
Property and Wealth: A special annual 3% tax is levied on the cadastral value of real estate owned by non-residents. Property owners are also liable to Net Wealth Tax and Real Estate Tax levied by the municipal government.
Capital Gains: Non-residents pay a flat rate of 18% on the capital gains tax.
Inheritance: Each beneficiary’s inheritance is taxed at progressive rates (7.65% - 34%) after certain tax-free amounts have been deducted.
Residents: Resident individuals are liable to tax on their worldwide income and assets but they are entitled to some allowances and tax credits.
BUYING GUIDE
Total transaction costs are moderate in Spain
The total roundtrip transaction cost is around 10% to 14%. This includes the Property Transfer Tax (6% or 7% depending on the autonomous region) and the real estate agent’s commission, which is around 2.5% to 3%.
For new properties, VAT is imposed instead of transfer tax. VAT for vacant land is 16%, while VAT is 7% for new houses, plus stamp duty. It is advisable to buy land with a house under construction or finished to minimize tax liability.
LANDLORD AND TENANT
Law and slow courts benefit tenants
Spain’s rental market is extremely pro-tenant.
Rent Control: The landlord and tenant have the contractual freedom to fix the rent and state the due date of payment. However, rent increases are tied to the Consumer Price Index and limited to once a year.
Tenant Security: The 1994 Urban Tenancy Act aimed to restore balance between the interest of landlords and tenants. It failed. Tenants are guaranteed tenure for five years. Courts are painfully slow in resolving cases of tenant eviction and compensation for rental arrears and damages.
ECONOMIC GROWTH
Strong economic fundamentals in Spain
The strong performance of the property market has been based on sound fundamentals:
* Spain’s relatively high rate of economic growth since 1994. The average annual GDP growth of 3.7% from 1998 -2006 was substantially above the EU average of 2%.
* Despite recent interest rate hikes, mortgage rates are still low at around 4.5% - 5.5% in April 2007, in sharp contrast to the 17% mortgage rate in 1991 and 10% – 12% from 1995 to 1996.
* The numbers of unemployed have fallen from 19% in 1994 to 8.4% at end-2006, and more women have entered the labor force. Real wages grew by an average of 3.2% annually from 2000 to 2006.
* There has been strong internal immigration, as Spaniards move from rural areas to the towns. Spain’s prosperity is very recent, and till recently Spain was a largely rural country.
Located in southwest Europe, Spain is a modern industrial country with a GDP per capita of US$27,814 in 2006 and a population of 45 million. Spain joined the European Economic Community in 1986 and was one of the founder members of the European Monetary Union in 1999. In 2002, Spain achieved full monetary union with the EU and adopted the Euro.
RESIDENTIAL PROPERTY AROUND THE WORLD
Asia & Pacific
Bubble fears prompt foreign ownership limits in China
America & Caribbean
The slowdown of the U.S. housing market
Middle East and Africa
Bahrain is open to foreigners and sizzling hot
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| RESIDENTIAL PROPERTY FACTS | |
| Price (sq.m): €5,160 For a 120 sq. m. property, usually an apartment. | Rental Yield: 2.87% For a 120 sq. m. property, usually an apartment. |
| Rent/month: €1,483 For a 120 sq. m. property. | Income Tax: 24.00% Assumptions: Owners are a non-resident couple drawing US$ / €1,500 per month in rent, with no other local income. |
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Roundtrip Cost:
12.2%
The total cost of buying and then reselling an apartment. Includes: * all transaction taxes and charges: * lawyers' and notaries' fees * agents' fees Assumptions: The buyers are non-resident foreigners. The apartment cost US$250,00 / €250,000. |
Cap Gains Tax: 29.8% Assumptions: The property was bought for US$250,000 / €250,000, and sold 10 years later, after a 100% appreciation. |
| Landlord & Tenant Law: Strongly Pro-Tenant Rating is based on a detailed study of each country’s law and practice. | |
MAY 2008
- Spanish property: the fiesta's is over - The Guardian
APRIL 2008
- Counting the Costa - The Economist
- The pain in Spain - The Economist
- Troubled Spanish property builders offer deals to lure buyers - IHT
- Tax pain in Spain is mainly on the wane but you must act fast - Daily Telegraph

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