Source: Libre Mercado

Bare ownership is a commonly used tool by elderly individuals. | Alamy

A new blow to homeowners in Spain. The Supreme Court has ruled that citizens who own a property in bare ownership will not be able to benefit from income tax deductions when selling it. They will only be able to do so if, after the death of the usufructuary of the property, the seller resides in the property for a minimum of three years.

Specifically, as reported by Expansión on Wednesday, the Supreme Court has rejected the idea that a bare owner—the person who holds the title to a property but does not have the right to use or enjoy it—can access exemptions for reinvesting the gains from the sale of their property, even if it was their primary residence.

But what exactly is a bare ownership transaction? It is a transaction where the buyer acquires ownership of the property, but the seller retains the right to use it until their death. Thus, the new owner will not have full ownership rights until the seller dies. This mechanism is popular among elderly individuals who wish to generate income without giving up the use of their home.

The Ruling

The Supreme Court ruling, issued on December 12, 2022, establishes that “the exemption from capital gains obtained from the sale of a primary residence requires that the property sold has been the primary residence for a continuous period of at least three years and that the seller has held full ownership of the property during that period. Bare ownership alone is not sufficient for these purposes.”

The court’s decision is based on the case of “Mrs. Celsa,” dating from 2007. The facts are as follows:

• Mrs. Celsa owns a property in bare ownership, where she lives habitually with her parents.
• When the last of her parents dies, she sells the property and tries to claim income tax deductions to buy another property with the profit obtained.
• The courts (now upheld by the Supreme Court) deny the deduction to Mrs. Celsa, as she could only be considered a “full owner” after her father, who held the usufruct of the property, died. Thus, despite having lived in the property for over three years, Mrs. Celsa cannot benefit from the deductions. She would need to wait another three years to sell the property and claim the deductions.

The Supreme Court argues that “since full ownership is what determines the taxable gain, it is evident that the exemption also requires that during the established period of three years, the taxpayer did not enjoy the property in any other capacity than as full owner.” According to the judges, “while residing in the property without holding full ownership, despite being a bare owner, her presence in the property would be considered a matter of tolerance, liberalism, or any other arrangement with the usufructuary.”

In other words, the Supreme Court believes that Mrs. Celsa’s residence in the property was solely dependent on the agreement with the usufructuary (her father), which did not qualify her as a full owner. This fact, which prevented her from accessing the income tax deductions, has now been confirmed by the Supreme Court, setting a precedent for similar cases.