Author: pmartinez-almeida

Source: Idealista

On January 1, 2022, the Cadastre Reference Value came into effect. This value serves as the taxable base for important taxes such as the Property Transfer Tax (ITP) and the Inheritance and Donations Tax (ISyD). In other words, it determines how much tax must be paid for the purchase, inheritance, or donation of a used property. However, in the case of property purchases, 25% of the valuations made by the Cadastre are above the market price, according to the Official College of Real Estate Agents of Madrid. Real estate agencies claim that this new value hampers the ability of buyers with limited savings and small investors who no longer see buying a house for rental as attractive.

The Official College and Association of Real Estate Agencies and Agents of Madrid (COAPIMADRID – AIM) indicate that 25% of the Cadastre valuations do not reflect the market reality because they are “artificially set above the market value.” What does this mean in practical terms when buying a property? The buyer will pay the ITP based not on the actual purchase price of the house, but on the Cadastre Reference Value, which, as noted, will be higher than the purchase price.

Why Is the Value Higher?

The value is generally calculated based on average prices in homogeneous areas of each municipality, so it does not take into account relevant factors such as the condition, orientation, or quality of the property. Therefore, if the buyer acquires an unrenovated house, the new reference value does not account for this, and the regional administration will determine a higher value for the property.

According to TECNITASA, this is problematic because, as it is an average of prices of sold properties, it cannot consider the specific characteristics of the property in question, such as location, condition, or renovations for residential properties, façade-to-depth ratio or construction quality for commercial properties, morphology for plots, or topography for rural estates. Thus, if the property in question has worse characteristics than the average of the samples, its reference value will be higher than its market value, and the taxable base will therefore be higher than what would correspond to its real value.

“TECNITASA handles numerous client inquiries, and during 2022, the issue of the Cadastre Reference Value has been particularly prominent, as taxpayers have the right to challenge and appeal it. To do so, they can use any admissible evidence in law, with a valuation report for determining the market value, performed by a certified appraisal company supervised by the Bank of Spain, being the main type of evidence,” says José María Basáñez, president of the firm.

David Paramio, director of Real Estate and Energy Consulting at Tinsa, reminds us that the valuation many buyers request for the property they wish to purchase is sufficient to present as evidence before the regional administration and challenge the ITP assessment.

In other words, the cost of the expert report and any other alternative evidence to refute the Cadastre Reference Value of the acquired property falls on the buyer, as the burden of proof is on them. If the tax savings at stake are significant, the cost will be manageable for the taxpayer. Therefore, it is necessary to evaluate whether it is worth challenging because, in some cases, the tax debt may not be very high, but the costs to challenge it could be.

Francisco Nomdedeu, a member of the General Council of COAPI of Spain, considers this a new factor for buyers as they must determine if they can handle a higher ITP, which “could represent a significant increase in the cost of purchasing.”

According to COAPI of Spain, this new Cadastre Reference Value affects both buyers with limited savings, who can no longer cover all expenses, and investors who no longer see the profitability of a purchase as clearly. “On the other hand, it could also add a negative factor for sellers, as it would result in a higher tax burden for the acquisition of their property,” adds Nomdedeu.

Increase in Litigation Over Tax Assessments

Pablo Álvarez, a judge of Administrative Litigation, had previously warned that this new reference value would increase litigation due to the greater scope for challenging tax assessments such as the ITP. It is possible to challenge both the assessment and the self-assessment, which “opens a path of appeals, prior to the payment of the assessment.” On the other hand, he highlights that the only case in which there will be no litigation is when the deed reflects a transmission value higher than the Cadastre Reference Value.

How to Challenge the ITP Charge Based on a Value That Is Not the Purchase Price?

There are two procedural avenues to challenge the Cadastre Reference Value. The first is to rectify the self-assessment, where the buyer must submit their ITP self-assessment, stating the Cadastre Reference Value as the taxable base, as José María Salcedo, a tax procedure lawyer, indicates. Then, they will request the correction of the self-assessment and the refund of undue payments.

“This option is the most advisable, as the taxpayer complies with the tax authorities by self-assessing and paying the tax, thus avoiding late payment interest or even sanctions that may result from failing to comply with the obligation to tax according to the reference value.”

The second option is to ignore the Cadastre Reference Value and self-assess based on the deed value or agreed value. In this case, if the reference value is higher, the taxpayer may receive an assessment and challenge it normally. However, this assessment will include late payment interest, and there is a possibility of sanctions.

The tax procedure lawyer points out that it is important for the expert report provided to “speak” the same “language” as the Cadastre used to determine the property’s reference value. “It should not be an alternative valuation to compare with the Cadastre’s to allow the Administration to decide which one is correct,” he adds.

This may occur, for example, if the expert report provided by the taxpayer indicates that the property’s condition is “fair,” while the Cadastre considered it “normal.” In this case, the provided evidence will demonstrate that the Cadastre’s description of the property is incorrect, allowing for a reduction in the reference value, according to José María Salcedo.

Other Legal Arguments Against the Cadastre Reference Value

There are not only technical arguments against the Cadastre Reference Value but also legal reasons, such as the lack of motivation for the reference value. Although it is possible to obtain a “justification certificate for the reference value” from the Cadastre’s website for some properties, it is completely unintelligible unless the taxpayer has technical knowledge in cadastral valuations.

“It is evident that the lack of justification of how this taxable base was calculated leaves the taxpayer in evident defenselessness. Moreover, it prevents the court judging the taxpayer’s appeal from issuing a legally sound decision. This is because, like the taxpayer, the court does not know how the Administration calculated the reference value,” says lawyer José María Salcedo.

Another legal reason that can be invoked is the different valuation of the same property for different taxes. For instance, in ITP or ISyD, the reference value will be applied, while in IRPF, the actual amount of the acquisition or transmission will be considered.

“It is clear that this interpretation clashes with the principle of valuation unity, defended by several courts. Especially when, as in this case, the technical fiscal concept of value is the same or very close in the involved taxes, and the admissible valuation method is the same. Furthermore, we are dealing with state taxes (although ITP and ISyD are transferred to the Autonomous Communities), so it makes no sense for the valuation of the same property to differ,” emphasizes Salcedo.

What Happens if the Property Does Not Have a Reference Value?

If the property does not have a reference value, taxpayers are only required to pay tax based on the “market value,” which could coincide with the deed value. In other words, the taxpayer should pay ITP and ISyD based on the market value, and they can rely on the deed value for this purpose. The tax authorities must prove that the deed value does not match the market value if they disagree with the taxpayer’s declaration.

In What Cases Will Value Checks Be Needed?

Value checks will still be necessary to determine the value of properties that do not have an assigned Cadastre Reference Value. In such cases, taxpayers will be required to pay based on the market value, and since this is a legally indeterminate concept, the Administration must initiate a value check if they disagree with the declared value, according to the methods outlined in Article 57.1 of the General Tax Law. Therefore, value checks similar to those carried out in recent times, which have been massively annulled by the courts, will continue to exist, warns José María Salcedo.

What Happens if Taxes Are Paid Below the Cadastre Reference Value?

If a taxpayer pays taxes below the Cadastre Reference Value assigned to the property, they will be violating the law, and the Administration will likely initiate a procedure to regularize the taxpayer’s situation and require them to pay taxes based on the Cadastre Reference Value. Salcedo also considers it possible that the tax authorities might initiate a sanctions procedure against the taxpayer for paying below the required value. However, the assessment can be challenged.