Reformed Property versus Unreformed Property

Do I Buy a Reformed Property or an Unreformed Property?

You are looking for a second residence, and are torn between a property that needs renovation and another more expensive property but that is already renovated.

Buying the Property – Well, if the total amount you are going to pay for both properties  is the same, then in most cases it will be more convenient to buy the renovated property.reformed property versus unreformed property

However if you have that itch, to put your own stamp on a property and renovating a property appeals to your creative nature, then sure go ahead, but be aware of the Tax implications when you go to sell.

See why

Capital Gain – If you sell your renovated property in the future, you will have to pay for the Capital Gain you receive (the difference between the acquisition value and the transfer value of the property).

Well everyone knows that!

But did you know you can end up paying more tax on a reform?

When you renovate a property, you will be doing two things:

1.Replacing existing parts of the property like floors, new kitchen units, internal doors, painting, plastering and general repairs.

This is considered works within the acquisition price and they will not be accounted for to reduce your Capital Gains Tax.

2. Improving the property – adding rooms, increasing the floor space, creating a pool and adding central heating for example.

According to the Treasury, only new installations that did not exist in the house (such as a new heating system) or expansion or restoration works, when the build area is enlarged or when the works are considered to be a legal restoration, will increase the acquisition price when working out the Capital Gains Tax.

Note: This will mean that to reform a property will incur a higher Capital Gains Tax than if you bought an already refurbished property.

The reason is that Hacienda considers (although their criterion is debatable) that only those works that are an improvement (as set out in number 2 above) can be added to the value of acquisition, when working out the Capital Gains Tax.

The expenses under number 1 cannot be accounted for the reduction of your Capital Gains Tax.

Example:

You can buy a renovated property for 180,000 Euros (taxes and expenses included)

Or

You can buy a property to reform for 120,000 (in which your restoration budget is 60,000 Euros).

When you come to sell the property, the renovated property will give you a saving of 13,400 Euros on your Equity gain Tax, where as the property you have reformed will cost you more Tax see table below.

 

Example

Reformed Property

Unreformed Property

Buying Price

180.000

120.000

Selling Price

210.000

210.000

Capital Gain from the Sale

30.000

90.000

Capital Gains Tax

6.180

19.580

Tax Rates: 19%Tax for the first 6,000 Euros, then 21% for the next 44,000 Euros and at 23% for the remainder…

So as a serious investor you need to be aware of these factors, but if you are buying a property to restore as that is going to be your dream house and you are going to live there until you die (please see our article on Wills and Estates) then the reformed property is still a good buy.

Have a chat with us and find out how we can help

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