Differences Between Cash Gifts and Gifts of Real Estate (“inter vivos”)
Differences Between Cash Gifts and Gifts of Real Estate (“inter vivos”)
Although both transactions are subject to Inheritance and Gift Tax, their tax implications are very different.
Cash Gifts
Advantages:
✔ They may qualify for certain regional tax reductions or allowances.
✔ They are relatively straightforward transactions.
✔ They do not trigger capital gains tax for the donor.
Example: Parents give their child €80,000 to purchase their first home.
Gifts of Real Estate
In addition to the Gift Tax payable by the recipient:
✔ The property must be valued for tax purposes.
✔ The gift may affect the donor’s income tax, and the donor may be liable for Personal Income Tax (IRPF).
✔ Municipal Capital Gains Tax (IIVTNU) may apply.
Important consequence
When a property is gifted, the tax authorities consider that the owner is “transferring” it, as if it had been sold.
If the property has increased in value since it was purchased, the donor may have to declare a capital gain on their income tax return.
Comparative Example
Case 1. Gift of €100,000 (Father → Son/Daughter)
· The child is liable for Gift Tax.
· The father does NOT pay Personal Income Tax (IRPF) on a capital gain.
Case 2. Gift of a flat valued at €100,000 (Father → Son/Daughter)
· The child is liable for Gift Tax.
· The father may have to pay Personal Income Tax (IRPF) on a capital gain.
· Municipal Capital Gains Tax may apply.
· The overall tax cost may be higher.
Special case: Gifts to children to purchase their main residence.
Two cases must be distinguished:
1. A cash gift to purchase a property intended to be the recipient’s first main residence.
2. A gift of a property intended to be the recipient’s first main residence.
A 95% reduction in the value of the property may be available, up to a maximum of €60,000 (€120,000 if the recipient has a disability), in both cases, whether the gift consists of cash or real estate and whether the gifts are made in a single transaction, in successive transactions or simultaneously (as these are aggregated for this purpose), provided that the following conditions are met:
– The gift must be made to a descendant under the age of 37 or to a person with a disability rating of 65% or higher.
– The recipient’s taxable income for Personal Income Tax (IRPF) purposes must not exceed €36,000 (after taking personal and family allowances into account).
– The money must be used to purchase a property that will become the recipient’s first main residence. This intended use must be stated in a public deed.
– The property must be purchased within 6 months of the cash gift.
✔ These provisions apply both to gifts consisting exclusively of money and to arrangements combining a gift of a property with a cash gift, whether the gifts come from the same ascendant or from different ascendants.
✔ For cash gifts, the reduction can only be applied to gifts made during the 6 months preceding the purchase of the property.
✔ As mentioned above, the impact on the donor’s Personal Income Tax (IRPF) must also be taken into account when gifting real estate.
