Have you and your sibling inherited a house of significant value and taken joint ownership? Are you now interested in becoming the sole owner but lack the funds to compensate your sibling? You may not be aware that there is an alternative: you can use another property as compensation.
Joint Ownership: A Common Scenario
Following the inheritance of a valuable house from a parent, you and your sibling may have chosen to divide ownership equally. This solution is often adopted when the property cannot be physically divided, and neither party can afford to compensate the other in cash. The intention is usually to sell the property in the future or for one sibling to eventually acquire the other’s share.
Compensation in Kind: A Viable Alternative
If you wish to keep the property but do not have sufficient funds—and would rather avoid taking out a mortgage—you have another option. If you own a second property, you can dissolve the joint ownership arrangement (the co-ownership established over the inherited house) and compensate your sibling with that other property, either in full or in part. Below, we outline how this type of transaction is taxed under current legislation.
Previously Treated as a Property Exchange
Until recently, the Spanish tax office regarded such arrangements as property exchanges (permutas). As such, both parties were subject to the Property Transfer Tax (Impuesto sobre Transmisiones Patrimoniales Onerosas, or ITP-TPO):
- The individual acquiring the remaining 50% of the jointly owned property was required to pay ITP-TPO at a rate of between 6% and 11%.
- Likewise, the sibling receiving the other property as compensation was also subject to ITP-TPO.
Updated Tax Treatment: No Longer an Exchange
Thanks to several rulings by the courts, the tax authority has revised its interpretation. Now, the transfer of a share in a jointly owned property is not considered an exchange, and is instead subject to the Stamp Duty (Impuesto sobre Actos Jurídicos Documentados, or AJD).
This means that now only the sibling receiving the compensatory property is now subject to ITP-TPO, and only in respect of that asset. This change significantly reduces the overall tax burden compared to previous treatment as a mutual exchange.
Example Transaction
Two siblings dissolve joint ownership of a house valued at 800,000€. One retains full ownership and compensates the other with 100,000€ in cash and a flat valued at 300,000€.
| ITEM | HOUSE ACQUIRER | FLAT ACQUIRER |
| Taxable base | 400.000€ | 300.000€ |
| Applicable tax | 1% AJD | 7% ITP-TPO |
| Tax payable | 4.000€ | 21.000€ |
Capital Gains Tax Considerations
When compensation involves property rather than money, both parties may be liable for Capital Gains Tax. For example:
- If the inherited 50% share of the house was valued at 360,000€ and the flat offered as compensation was originally purchased for 250,000€:
- The sibling transferring the flat must declare a capital gain of 50,000€ (300,000€ – 250,000€). Relevant costs, such as municipal capital gains tax (plusvalía municipal), may be deducted.
- The sibling transferring the remaining share of the house must declare a capital gain of 40,000€ (400,000€ – 360,000€), with similar deductions available.
Plusvalía Municipal (Town Hall Capital Gains Tax)
- The transfer of the flat may be subject to plusvalía municipal, depending on local regulations.
- However, the transfer of the remaining 50% share in the house—being part of a dissolution of a jointly owned, indivisible asset—is not subject to this tax.
Final Notes
When drafting the deed of dissolution of joint ownership, you (as the individual retaining the inherited property) will be responsible for AJD. Your sibling, who receives another property in exchange, must pay ITP-TPO on the property received.
This structure offers a more tax-efficient route to full ownership, without the need for cash compensation or additional financing.
